Last updated: Oct. 11, 2019
Are you worried about saving for your child’s education after high school?
What if we told you there’s a way you can start saving now for their future, and get a boost from the Canadian government?
The registered education savings plan (RESP) is a savings account that can be set up by parents, grandparents, guardians, relatives or family friends for your child.
You can invest the funds in any way you wish, whether it’s through mutual funds, guaranteed investment certificates (GICs), stocks, bonds or exchange-traded funds (ETFs).
The sooner you set up the RESP and invest the funds, the longer investment income can accumulate, and the more you can contribute to an education fund for the child in your life.
While contributions to a RESP are not tax-deductible, any investment gains will build up tax-free while the plan is active.
Plus, the Canadian government will contribute to your RESP in the form of education grants, which means more money for your child’s education.
You can open an RESP at any financial institution as long as you have your Social Insurance Number (SIN), along with the child’s SIN.
What education grants are available for my RESP?
The government will match 20% of what you contribute per year, up to $2,500 per account, through the Canada Education Savings Grant (CESG).
What that means is that you can contribute more than $2500 to the account, but you won’t get more than $500 from the government per year.
The lifetime maximum the government will contribute is $7,200, and the child will qualify for the CESG until the end of the year they turn 17.
They can also carry forward unused CESG contribution room until they turn 17.
You can also receive additional funds through the Canada Learning Bond if you are a lower-income family.
The Canadian government will contribute up to $2,000 to an RESP per child.
This includes $500 in the first year of eligibility and $100 each year until the child turns 15.
The good news is you don’t need to have any money in the RESP for your child to receive the Canada Learning Bond.
What can the RESP be used for?
The money in a RESP can be used to pay for expenses related to part-time or full-time studies in:
- Apprenticeship programs
- Colleges
- Trade schools
- Universities
If your child continues with education after high school, they receive the funds in the form of educational assistance payments.
These payments aren’t taxable — your child is taxed on any investment gains and the government grant money.
Since your child is likely to be in the lowest tax bracket while attending school, that means they’ll pay very little tax — or no tax at all — on the money.
They also may be able to receive educational assistance payments for up to six months after they finish their education.
How long can I contribute to a RESP?
You can contribute to the RESP for up to 31 years (35 years if your child qualifies for the disability tax credit).
The plan can stay open for a maximum of 35 years (40 years if your child qualifies for the disability tax credit) in case it takes a while for your child to decide if they want to continue their education after high school.
There’s no annual contribution limit and the lifetime contribution limit to a RESP is $50,000.
What if my child decides not to continue their education after high school?
If your child decides not to continue with school, you can transfer the RESP to their sibling (if they’re under 21).
Otherwise you would pay tax on any accumulated income in the RESP if you withdraw it and use it.
It would be taxed at your regular income level plus an additional 20%.
If there’s no sibling, you may be able to transfer the funds to your personal RRSP tax-free (as long as you have enough contribution room).
RELATED: We provide a guide to the key differences between a TFSA and RRSP.
You could also contribute the money to a spousal RRSP account.
Grant money from the CESG must be returned to the government if it isn’t transferred to a sibling.
Disclaimer: The material above is provided for educational and informational purposes only. Please contact a tax professional like FBC regarding your specific tax situation.