It’s nearing that time of year again. Summer is coming to an end as it usually does all too quickly, and children of all ages are getting ready to head back to school. For some, it’s simply a return to the familiar routine of primary or high school. For others, it may mean heading off to university, college, trade school, or another post-secondary program, perhaps for the first time.
Whether your children or grandchildren are still young or are already preparing for post-secondary education, a Registered Education Savings Plan (RESP) can be an effective way to help fund their education.
Some of you may have been contributing to an RESP for many years. Others may be preparing to make your first withdrawal to help cover tuition, books, housing, transportation, and other costs.
RESPs can be extremely valuable, but the rules surrounding contributions, government grants, and withdrawals can sometimes be confusing. The following is intended to provide a straightforward overview of some of the key RESP rules and considerations.
What Is an RESP?
A Registered Education Savings Plan (RESP) is a registered account designed to help Canadians save for a beneficiary’s post-secondary education.
RESP contributions are not tax-deductible, but the investments held within the plan can grow tax-deferred. The account can also receive government incentives, most notably the Canada Education Savings Grant (CESG).
When the money is eventually withdrawn for educational purposes, the tax treatment depends on which portion of the RESP is being withdrawn.
Generally, an RESP consists of three main components:
- Contributions – money contributed by the subscriber. These are not taxable when withdrawn.
- Government incentives – such as the CESG and, for eligible families, the Canada Learning Bond (CLB).
- Investment earnings – the growth generated by the investments held within the RESP.
The government grants and investment earnings are generally paid to the student as Educational Assistance Payments (EAPs) and are taxable in the student’s hands. Since students often have relatively low taxable incomes, the tax payable may be minimal or even zero.
RESP Contribution Rules
One of the most important RESP rules to understand is the $50,000 lifetime contribution limit.
The $50,000 limit applies per beneficiary, across all RESPs. This means that if parents, grandparents, and other family members all contribute to different RESP accounts for the same child, their combined contributions cannot exceed $50,000.
Unlike an RRSP or TFSA, there is no annual RESP contribution limit. However, this does not mean that unlimited contributions can be made; the $50,000 lifetime limit still applies.
It is also important to remember that contributions from multiple family members should be coordinated. Exceeding the $50,000 lifetime limit can result in a 1% per-month penalty tax on the excess contributions until the excess is withdrawn.
Understanding the Canada Education Savings Grant (CESG)
One of the biggest advantages of an RESP is the Canada Education Savings Grant.
Under the basic CESG, the federal government contributes 20% of the first $2,500 of annual RESP contributions, providing up to $500 of basic CESG per year.
If there is unused CESG contribution room from previous years, it can be carried forward. This means a family may be able to contribute up to $5,000 in a year and receive up to $1,000 of CESG, assuming sufficient unused grant room is available. The lifetime CESG maximum is $7,200 per beneficiary.
Depending on family income, a child may also qualify for an additional CESG on the first $500 of annual contributions. This can increase the annual CESG above the basic $500—for eligible families, the total annual CESG can be as high as $600. Because the income thresholds are indexed and can change over time, families should confirm their eligibility each year.
Another important note, CESG is available on contributions made up to the end of the calendar year in which the beneficiary turns 17. However, there are special rules for children who are 16 or 17. To receive CESG at those ages, one of the following must generally have occurred before the end of the calendar year the child turned 15:
- At least $2,000 must have been contributed to the RESP and not withdrawn; or
- At least $100 per year must have been contributed in at least four different years.
In other words, if you want your child to remain eligible for CESG at age 16 or 17, you cannot wait until they are 16 to begin saving.
Starting early also gives the investments more time to benefit from tax-deferred compound growth.
Canada Learning Bond (CLB)
For eligible lower-income families, the Canada Learning Bond (CLB) can provide additional government assistance. The CLB can provide up to $2,000 per eligible child, and unlike the CESG, personal contributions are not required to receive the bond. The CLB is income-tested and has its own eligibility requirements. Eligible individuals who did not receive the CLB as children may also be able to claim it themselves after turning 18, subject to applicable rules.
Individual vs. Family RESP
Families with more than one child may want to consider a Family RESP. A Family RESP can name multiple beneficiaries and may provide greater flexibility when determining how the accumulated savings will be used between children. For example, if one child receives a scholarship, chooses not to attend post-secondary school, or simply requires less funding, there may be an opportunity to use RESP savings for another eligible beneficiary, subject to the applicable rules.
How RESP Withdrawals Work
RESP withdrawals are one of the areas where clients often have the most questions.
There are two primary types of withdrawals when a child is attending an eligible post-secondary program:
- Withdrawal of Contributions – These are the original contributions made to the RESP. Because contributions were made with after-tax dollars, they can generally be withdrawn tax-free.
- Educational Assistance Payments (EAPs) – EAPs consist of the government grants, investment earnings, and other accumulated income or incentives in the RESP. EAPs are paid to the student and are reported as the student’s taxable income. The student will receive a T4A slip for the taxable portion of the withdrawal.
This distinction is important because an RESP withdrawal is not necessarily 100% taxable. A withdrawal can contain both a tax-free return of contributions and a taxable EAP.
What Do You Need to Withdraw From an RESP?
The exact paperwork can vary between RESP providers, but generally a withdrawal will require confirmation that the beneficiary is enrolled in an eligible post-secondary program.
This includes:
- Proof of enrolment or equivalent documentation from the educational institution. This is any sort of document that indicates the child is in fact going to school. It should include their name, some indication of the program they are in, and some indication of the period of time they are in school.
- An RESP withdrawal request/form completed by the subscriber and/or beneficiary, depending on the type of withdrawal.
How Much Can You Withdraw From an RESP?
This is an area where there is an important distinction between EAPs and withdrawal of contributions.
For a student enrolled in a qualifying full-time post-secondary program, EAPs are generally limited to $8,000 during the first 13 consecutive weeks of enrolment. After the student has completed those 13 consecutive weeks, there is generally no legislated dollar limit on EAPs, provided the student continues to qualify. If the student takes a break and does not re-enrol in a qualifying program for 12 months, the $8,000 first-13-weeks limit can apply again.
For students enrolled in a qualifying part-time program, EAPs are generally limited to $4,000 for each 13-week period.
Withdrawal of contributions does not have the same stipulations above and effectively has no limit. However, it is important to plan around how much is needed for future use and structure withdrawals accordingly.
What Can RESP Money Be Used For?
RESP funds can help cover much more than tuition.
Depending on the circumstances, reasonable education-related and living expenses can include things such as:
- Tuition
- Books and school supplies
- Rent or accommodation
- Food
- Transportation
- Computers and other equipment
The key consideration is that the funds should be used to help further the student’s post-secondary education. The amount requested must be reasonable under the circumstances.
What Happens If Your Child Doesn’t Attend Post-Secondary School?
One common misconception is that all the money in an RESP is lost if a child decides not to attend post-secondary school. Fortunately, that is not necessarily the case.
Your original contributions generally remain available to you and can be withdrawn tax-free.
Government grants such as the CESG generally must be returned if they are not used for qualifying education.
Investment earnings may have several potential outcomes. Depending on the circumstances, they may be:
- Used by another eligible beneficiary
- Transferred to another RESP
- Potentially transferred to the subscriber’s RRSP, subject to specific conditions and available RRSP contribution room
- Withdrawn as an Accumulated Income Payment (AIP), which is taxable and generally subject to an additional 20% tax.
Final Thoughts
An RESP remains one of the most valuable education savings tools available for families.
The combination of government grants, tax-deferred investment growth, and tax-efficient withdrawals for students can make a significant difference in the amount available to help fund post-secondary education. Maximizing the benefits of an RESP requires more than simply making contributions. Understanding the contribution limits, available government incentives, withdrawal rules, and options if a child doesn’t attend post-secondary school can help you avoid unnecessary tax and maximize the value of the account.
Whether your child is just starting school or preparing to head off to university, college, or trade school, a little planning can go a long way toward making the most of your education savings. Let us know if you have any questions or would like to review your RESP plans. Always happy to help.
Thanks for reading.
Chris Horn
Wealth Advisor
The Andrews Group
CI Assante Wealth Management Ltd.
CI Assante Wealth Management Ltd. is a Member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.