What is the RESP in Canada? An Education Savings Guide

In recent years, the expense of tertiary education in Canada has comfortably outpaced inflation and shows no indications of slowing down. Luckily, parents can use the Registered Education Savings Plan to save for their child’s future education. 

This article will teach you everything you need to know about the RESP in Canada, as well as its advantages and disadvantages.

Let’s go!

What Is an RESP?

An RESP is an investment account that allows you to put money aside for your child’s post-secondary education. 

Because the government pays up to $7,200 per child (more in certain provinces), it’s the best saving method, and your RESP grows tax-free until you withdraw the grants and investment earnings. 

In most situations, students receive this free money without paying any taxes.  

How Does It Work?

An RESP consists of three participants:

• The subscriber is the child’s parent and is responsible for opening the RESP account and making contributions. Subscribers cannot deduct their contributions from their income on their Income Tax and Benefit Return.
• The promoter is the financial institution in possession of the RESP. It pays out the amount once the child attends post-secondary education. The promoter normally pays the contributions to the subscriber at the end of the contract if they aren’t paid to the beneficiary. When subscribers get their contributions returned, they are not required to include them in their income.
• The beneficiary is the child that will eventually receive the child education funds from the RESP.

Here’s a quick rundown of how an RESP works: 

1. A subscriber signs an RESP contract with the promoter, naming one or more beneficiaries.
2. The subscriber makes RESP contributions. The government will pay grants such as the Canada Education Savings Grant (CESG) or any other recognized provincial education savings program to the RESP if they are available.
3. The promoter manages all RESP funds. The income is tax-free if it stays in the RESP. The promoter also ensures that all RESP payments are under the RESP’s terms. 
4. The promoter has the option of tax-free refunding the subscriber’s contributions.
5. The promoter may make payments to the beneficiary to assist with the cost of their post-secondary education.
6. The promoter has the option to make payments based on accumulated income.

Types of RESPs

Choosing the correct RESP is critical. If you have doubts, ask for assistance from your financial institution. A bank, a mutual fund business, a credit union, an investment dealer, or a group plan dealer are all places where you can open an RESP. 

You will come across three types of plans: 

Family Plan

If you have more than one child, a family RESP is ideal.

You can designate one or more children to receive the funds when it comes time to pay for their post-secondary education. The children must be your blood relatives or adopted by you. This includes your biological children, stepchildren, grandchildren (including adopted grandchildren), and brothers or sisters. 

The Income Tax Act defines a “blood relationship” as one between a parent and a child (or a grandchild or a great-grandchild) or between a brother and a sister. Blood relations include nieces, nephews, aunts, uncles, and cousins. Naturally, you cannot be considered a blood relative of yourself.

With a family plan, children can share the earnings of a family plan, and any beneficiary listed in the RESP can use the Canada Educations Savings Grant, up to a maximum of $7,200. You will receive the Additional Canada Educations Savings Grant and Canada Learning Bond only if all of the beneficiaries in the plan are siblings.

Individual (Non-Family) Plan 

If you aren’t related to the child you are saving, this type of plan is ideal. You name only one beneficiary in this type of RESP, and the beneficiary doesn’t have to be a relative to you. 

You can open this type of RESP for yourself or another adult, but only qualifying beneficiaries will receive the Canada Educations Savings Grant and the Canada Learning Bond. 

Group Plan 

A group plan is intended for a child who doesn’t have to be your relative and is perfect if you can make regular payments over the RESP’s term. Your savings are pooled with other people’s savings in this type of plan. The amount of money in the group account and the number of students of the same age in school that year determine how much each child receives. 

Group plan dealers supply these plans, and they frequently invest the money in low-risk investments. Each group plan is unique and follows its own set of rules. Read the plan rules carefully, just as you would any other investment.

Typically, they will ask you to commit to making regular payments into the plan over a specified period. If you stop making these regular payments, fees may apply. Suppose you’d rather have someone else invest your money and are confident that the child you’re saving for will continue their education beyond high school. In that case, group plans are a terrific alternative. 

Contact your group plan dealer or visit the CRA website for additional information about RESPs.

How to Open an RESP?

Follow these two simple steps to open an RESP:

1. Get a Social Insurance Number (SIN) for your child, and if you don’t already have one, get one for yourself. There is no charge; however, certain documents, such as birth certificates. 
2. Select the RESP provider that best meets your needs. The majority of financial institutions (such as banks and credit unions) and qualified financial advisers and group plan dealers offer RESPs. 

You can invest in many investment assets through an RESP account, including Exchange-Traded Funds (ETFs), mutual funds, equities, bonds, GICs, etc.

Self-directed RESP accounts (i.e. the DIY option) can save you money if you know what you’re doing. 

Using the services of an online money manager, known as a robo-advisor, is a more cost-effective and hassle-free option for most people. 

RESP Withdrawal Rules

Now that we’ve covered the basics of RESPs, let’s check out the withdrawal rules:

• Only the subscriber, the person who sets up the RESP account and pays contributions, can make withdrawals. Withdrawals are not possible for the student (also known as the beneficiary). Post-Secondary Education Payments are withdrawals of the subscriber’s contributions (PSE). They can go to the Subscriber or the Beneficiary. Only the beneficiary can receive withdrawals of the government grant/bond part (known as the Education Assistance Payments – EAP).
• The subscriber must produce confirmation of enrolment to the financial institution that maintains the RESP (the “Promoter”), verifying that the student (beneficiary) is a part-time or full-time student in an accredited post-secondary institution. One can use the following as proof: an offer letter, a course confirmation, or other information indicating the student number, term, and program name.
• According to RESP rules in Canada, payments to the PSE are not taxed. Withdrawals from the EAP will be charged to the student. Only for EAP payments will the financial institution produce a T4A tax form in the student’s name. 
• The student can withdraw unlimited subscriber contributions (PSE). The limit of EAP payments during the first 13 weeks of school is $5,000 (government portion).

Maximum RESP Withdrawal

A student can withdraw any amount of EAP contributions once the 13-week period has passed. 

For full-time education, each RESP beneficiary can receive a maximum of $7,200 in government grants/bonds or $3,600 for part-time education. They must repay the government if they withdraw any sum over that. Keep a close eye on the EAP part, especially if you have a family plan. 

If the program’s costs exceed the limit, your RESP’s financial institution can request the Minister of Employment and Social Development’s permission to withdraw more money. 

RESP Withdrawal Penalty

You could incur steep penalties if you close the RESP before the funds run out because your child does not continue post-secondary school or withdraws early. The government will retrieve the government portions, and you will be free to withdraw your contributions. 

But what about earnings from investments? Accumulated Income Payment refers to investment earnings that remain in an RESP after the plan collapses. You must report that sum as income, and you must pay taxes at your marginal rate plus a 20% penalty.

If you or your spouse have room in a Registered Retirement Savings Plan (RRSP), you can move the AIP (up to $50,000) to your RRSP tax-free. If you meet the following conditions, you can complete the transfer:

• If the subscriber is a Canadian resident
• If the payment is only available to one subscriber
• If each beneficiary is over 21 and not eligible for EAP, and the RESP has been open for at least ten years

RESP Contribution Limit

Although there is no limit to the amount you can provide each year, only the first $2,500 qualifies for the 20% RESP government matching grant. A lifetime contribution to an RESP is limited to $50,000 per beneficiary.

The lifetime contribution limit of $50,000 does not include government grants deposited into the account. 

Additionally, the maximum CESG every year is $500, and you can carry any unused fund forward to future years until age 18.

Is it possible to contribute too much money to an RESP? Yes, but it will cost you. If you contribute more than $50,000 per RESP beneficiary over the lifetime limit, you will have to pay a 1% per month penalty until you withdraw the excess amount.

Benefits and Drawbacks of Opening an RESP

Consider the following benefits and drawbacks before opening an RESP account using this investment tool.

Benefits of RESP 

• Save for a large expense in advance: With a fully-funded RESP, parents will have fewer financial obligations when their child begins post-secondary education.
• Tax-free compounding: An RESP provides a strong investment incentive for a child’s education while avoiding paying taxes on the earnings (capital gains, dividends, and interest). 
• Annual grant: If you invest in an RESP, you’ll be eligible for a Canadian Education Savings Grant (CESG) of 20% of your contribution each year. A lifetime award of $7,200 is available to each child. Your provincial government may potentially provide you with additional funding. 
• No tax deductions: Unlike RSPs, contributors do not receive tax deductions from their RESP investments. No taxes are due until you withdraw the money to pay for the child’s education.
• Save the child from student debt: Creating a savings account for the child’s future education will help them avoid debt while they are still in school.
• Dedicated savings account: RESPs provide parents with separate savings accounts for a significant financial goal. If they have combined this money with other child education funds, they might spend it elsewhere. 
• Keep the child’s focus in school: Some students work during the summer and others during the school year to supplement their income. Saving for a child’s education will allow them to focus their free time on their schoolwork and co-curricular activities. 
• No minimum investment amount: You can start and stop contributing to the investment plan according to your financial situation. There are no consequences for ceasing to contribute. 
• Multiple RESP accounts: You can have multiple RESP accounts with various contributors. However, the same lifetime grant applies to all of your child’s RESP accounts.
• Different investment plans: As an investment incentive, you can choose from individual, family, or group plans. Always weigh the benefits and drawbacks of a potential investment. 

Drawbacks

• Taxation on withdrawal: Once you withdraw the money from the RESP account to pay for education, you will have to pay taxes for all government grants and income earned on the account. 
• Grant money repossession: If a child does not pursue approved post-secondary education within 36 years of opening the RESP account, the government will request a refund of the grant money. 
• Income tax on non-education expenses: Any money withdrawn from an RESP account not used for educational purposes is subject to income tax and a 20% penalty.
• Provide proof to withdraw from RESP: To withdraw money from an RESP account and receive all of your child’s benefits, you must prove that your child is enrolled in a qualifying education program. 
• Service costs: There are costs associated with RESP investment incentives; be aware of all costs before opening any type of account, and be mindful of how to reduce them.
• Penalty: You can contribute up to $5,000 over their lifetime for each beneficiary. If you give more than $5,000, you will have to pay a monthly penalty of 1% on the amount you contributed over $5,000 until you withdraw it. 
• Age limit: Until the age of 15, a child can receive national child benefit grants of $500 per year from the Canada Learning Bond. 
• Early withdrawal: If you withdraw contribution money before your child begins post-secondary education, you will lose CESG grants for two years and will have to repay a proportional amount of CESG.
• Changing beneficiary: If the new beneficiary is not a sibling or is under the age of 21, the government will retrieve the CESG grants. 

RESP vs TFSA vs RRSP

If you’ve been thinking about getting on a savings plan, you must be torn between an RRSP, TFSA, and RESP. Take a look at our side-by-side comparison to make an easier decision.

RESP	TFSA	RRSP
Tax deferral and government grants	Tax-free interest, dividends, and capital gains	Tax deferral
Savings plan to help your children or grandchildren pay for their post-secondary education	Savings plan to help you reach your life goals or improve your retirement	Great way to save money for your retirement
Investment income is tax-free and qualifies for incentives from the federal and provincial governments	Investment income is not taxable	Investment income is taxable only upon your withdrawal
Contribution deadline: December 31	Withdrawals are allowed at any moment (depending on the investment type) and are tax-free	Withdrawals are added to your taxable income (except in the case of the HBP and the LLP)
Annual contribution limit to maximize grants: $2,500	Annual contribution limit for 2022: $6,000	Contribution deadline for the 2021 tax year: March 1, 2022
	If you never contributed, you may have up to $81,500 in contribution room	Limits on annual contributions in 2021: $27,830

 

As you can notice from the table, which plan you should invest in depends mainly on your financial status, income level, and your savings needs.

Conclusion

From the information provided, it is clear that an RESP account is a great way to save money for your child’s post-secondary education. The account offers many benefits, including tax deferral and government grants, making it a very attractive option for parents and guardians looking to save for their child’s future. 

However, there are also some drawbacks to the RESP account, such as service costs and a penalty for early withdrawal, that should be considered before opening an account. 

Overall, the RESP account is a great way to save for your child’s future and help them pursue their post-secondary education goals.