RESP Rules: How Canadians Can Save For Post-Secondary Education With an RESP
November 12, 2020
- RESPs can be opened by any Canadian resident with a Social Insurance Number (SIN).
- Anyone can open an RESP for a beneficiary, including parents, grandparents, aunts and uncles, and even the employers of a beneficiary’s
- RESP contributions grow tax-free.
- Government grants can potentially add thousands of dollars to an RESP over the life of the account.
- Quebec residents may be eligible for up to $3,600 with the Quebec Education Savings Incentive (QESI).
About the Registered Education Savings Plan (RESP)
The RESP is both a popular and tax-advantaged way for Canadians to save and plan for a child’s post-secondary education. The RESP is advantageous because it’s flexible, the money saved into it grows tax-free, and it allows subscribers to benefit from government grants, like the Canada Education Savings Grant (CESG). Plus, Educational Assistance Payments (EAPs), which are used to pay for education-related expenses, are taxable at the student’s income tax rate. Subscribers can choose from different investment options based on their risk tolerance as well as how much and how often they want to contribute1. Contributions can be made into an RESP for up to 31 years, and plans can remain open for up to 35 years, at which point the money accumulated into the account must be withdrawn. All in all, the RESP is a great way for Canadian families to reach their educational savings goals quickly.
Anyone can set up an RESP account for a child. This includes grandparents, aunts, uncles and other family members, as well as parents' employers. RESP beneficiaries must be Canadian residents and have a Social Insurance Number (SIN). If the beneficiary does not yet have a SIN, a parent or guardian can apply for one via a Service Canada Centre. The beneficiary must be a Canadian resident at the time the RESP is opened and when contributions are made.
Contribution Rules and Limits
You can contribute any amount to an RESP, but there is a lifetime contribution limit of $50,000 per beneficiary. You can contribute by making one or several one-time contributions or by spreading your contributions over a number of years1. RESP contributions are not tax deductible, but they grow tax free and are not taxed when withdrawn from your plan.
The Canadian government matches 20% of the first $2,500 contributed into an RESP each year, up to a maximum of $500 per year. If you have unused grant room, you can receive up to $1,000 in CESG annually. Every Canadian child is entitled to receive the CESG. Children of low- and middle-income families may also be eligible for an additional CESG matching 10% to 20% of the contributions, up to an annual limit of $100 per beneficiary.
Canada Learning Bond (CLB)
Beneficiaries from lower-income families may receive the Canada Learning Bond (CLB), even if the subscriber doesn’t contribute to the RESP. For example, beneficiaries who were born after December 31, 2003, and whose family received the National Child Benefit Supplement could be eligible for the CLB. Eligible beneficiaries will receive an additional CLB amount of $100 every year until they turn 15 years old. CLB amounts have a lifetime limit of $2,000.
RESP Grant for Quebec Residents
Every child in Quebec is entitled to the Quebec Education Savings Incentive (QESI). The basic QESI is a refundable tax credit corresponding to 10% of the contributions paid into an RESP during any given year, up to $250 annually.
If you don't contribute at least $2,500 in any given year, you can recover unclaimed QESI amounts in future years. These amounts accumulated from previous years can be added to the basic amount, up to $250 per year. However, the total basic QESI cannot exceed $500 in any given year. Beneficiaries from low- and middle-income families may also receive an additional QESI amount of up to $50 each year. QESI amounts are subject to a lifetime limit of up to $3,600 per child.
There are two types of RESP withdrawals: those made for qualified education-related expenses and those that are not.
Withdrawals for education-related expenses
When beneficiaries enroll in a qualifying educational program, i.e a vocational, college or university program, they can begin receiving EAPs from their RESP2. These payments can be used for a variety of expenses, including tuition, housing, books, groceries, and so forth.
Contribution withdrawals are not taxed, but grants and investment income on grants and contributions, which make up EAPs, are taxed in the student’s hands in the year they are withdrawn. The student must declare EAPs as income.
Subscribers can withdraw their contributions, excluding the applicable sales charges, tax free at any time. However, if you withdraw your contributions before plan maturity, the grants will be returned to the government.
What if the beneficiary does not enroll in post-secondary education?
Sometimes, beneficiaries choose not to pursue a post-secondary education. In other cases, a disability or some other circumstance may prevent the beneficiary from attending. If you have a family RESP, certain government grants can be transferred to another beneficiary in the same plan3. If you have an individual plan, you can name another beneficiary3. If you meet certain conditions, you could withdraw part or all of the income accumulated under your plan4. However, withdrawals will be taxed and an additional 20% penalty will have to be paid, unless you transfer the balance to a Registered Retirement Savings Plan (RRSP).
Want to know more about how an RESP can help you reach your post-secondary education savings goals? Contact us today.