Canada sits among the top five on the World Bank’s list of countries with the highest percentage of people who completed post-secondary education. That’s no small feat. How did Canadians do it? Hint: it’s not simply a result of a national love for learning.
Instead, we’re fortunate to have a number of government programs and initiatives that make post-secondary education more accessible. One of the most popular—but perhaps, least understood—options out there is the RESP.
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What Are the Advantages of an RESP?
An RESP, or Registered Education Savings Plan, is a savings account that makes it easier for Canadian parents and guardians (called “subscribers”) to save for a child’s post-secondary education.
There are two main features of an RESP that makes them superior to a standard savings account: First, RESPs make it possible for you to earn tax-free income from savings or investments held within the account. Second, an RESP allows you to to earn government grants to help you meet your savings goals.
How Does an RESP Work?
Anyone can contribute to or even open up an individual RESP for a child. Some adults may even give RESP contributions as a gift. While you do not need to be a relative to open and contribute to an individual RESP, family RESPs do require beneficiaries to be a blood or adoptive relative. If you want to open an RESP for a baby on the way, it’s not possible before the child is born because all children with RESPs (called “beneficiaries”) need to have a Social Insurance Number (SIN).
Contributing to an RESP for a loved one is something that Shanalisa Keller, a B.C.-based CPA better known as “The Canadian Finance Gal,” recommends.
“If you are a parent, grandparent, friend of the family or god parent, and want to invest in a young child’s future and you have the opportunity to give a meaningful gift, consider giving to an RESP in lieu of a more traditional baby shower or first birthday gift,” says Keller.
“The child will not understand the difference either way at that age, but will be incredibly grateful 18 to 20 years in the future, when they are trying to figure out how to pay for expensive university bills.”
An RESP is essentially an investment vehicle. This means that it’s up to the subscriber or contributor to decide how to maximize its earning potential. While an RESP can act as a savings account that earns average annual interest, You can invest RESP(s) in stocks, mutual funds, options, or GICs that sit within your RESP to maximize growth. But if self-directed investing doesn’t interest you, you can choose to work with a robo-advisor. A robo-advisor allows you to benefit from a “hands-off” approach by investing your money automatically based on your risk tolerance and time horizon.
How Do RESP Grants and Bonds Work?
All RESP beneficiaries are eligible for the Canada Education Savings Grant (CESG). Through the CESG, the Canadian government gives beneficiaries $500 for every $2,500 contributed to the account to a lifetime maximum of $7,200. The CESG amount that you are entitled to is indexed to inflation and changes each year. These are the income brackets for 2023:
CESG earnings by income:
Low-income families with children born in 2004 or later are also eligible for the Canada Learning Bond (CLB). Eligibility is based on household income relative to the number of children living there. For example, for the July 1, 2022 to June 30, 2023 benefit year, a household with one to three RESP-eligible children must make no more than $50,197 to receive the bond. The more children in the home, the higher the eligible amount. For example, with four children in the house, the eligible amount increases to $56,636.
The Canada Learning Bond amounts to $2,000 of grant money per RESP—$500 for the first year a beneficiary is eligible and $100 for every year their eligibility continues for a maximum of $2,000.
Canada Learning Bond income thresholds:
British Columbia and Quebec also offer their own provincial RESP add-ons. In British Columbia, the B.C. Training and Education Savings Grant (BCTESG) offers $1,200 for every RESP beneficiary. In Quebec, the Quebec Education Savings Incentive (QESI) offers assistance through the form of a refundable tax credit of up to 10% of your RESP contribution for a maximum of $250 per year ($300 for low-income families).
How to Open an RESP
To open an RESP, you must be a Canadian resident. You will need to have both yours and your child’s SIN on hand.
If you meet those eligibility requirements, you can open an RESP through one of the following:
- Banks: All of the Big Six banks offer RESPs to their customers, as do some—but not all—online-only banks.
- Credit unions: Unlike a bank, a credit union is a non-profit institution. This means that sometimes they may offer fewer services compared to their for-profit counterparts, but they also charge lower fees to keep accounts open.
- Mutual fund companies: Mutual funds allow Canadian investors to pool their money together to collectively benefit from dividends. Some mutual fund providers also offer RESP accounts to their customers.
- Investment dealers: Unlike a mutual fund company, an investment dealer sells a variety of investment products (not just mutual funds), including RESPs.
- Group plans: Sometimes called scholarship funds, a group RESP is different from a regular RESP. Group RESPs are provided by a plan dealer who pools money together from multiple contributors and delegates it to low-risk investments. Group RESPs do have drawbacks, including their strict contract-bound long-term contribution plans, which can be difficult for the average person to understand.
Some RESP providers set their own terms including fees, contribution limits and payment options, so it’s important to research them before you decide which provider is best for you and your family. To help with that decision, The Government of Canada maintains a list of recognized RESP providers.
What Is the Maximum Lifetime Contribution Allowed for an RESP?
Once an RESP is active, it’s possible to make contributions for another 31 years. RESP accounts can then stay open for five years following the last contribution for a total of 36 years.
There’s no annual contribution limit to an RESP, but there is a lifetime limit of $50,000. This limit applies across all RESP accounts, even if the child is the beneficiary of more than one, so it’s important that the subscribers coordinate with one another to avoid contributing over the limit.
Anyone who exceeds the RESP contribution limit of $50,000 is subject to a monthly fee equivalent to 1% of the total overcontribution amount
Do You Have To Go to University To Use an RESP?
It’s a common misconception that RESPs can only be used for four-year university degree programs. The term “post-secondary institution” is much more apt, as an RESP can actually be used for a number of apprenticeship, college, and vocational training programs. The institution may be inside or outside of Canada, which means that students can use RESP money to study abroad.
The Government of Canada maintains a list of national educational institutions. The list is not exhaustive, so it’s best to confirm individual institution eligibility with each provincial or territorial student aid authority.
What Part of an RESP Withdrawal Is Taxable?
The earnings that you accumulate in an RESP are taxed when they enter a student’s hands. When the money from an RESP is paid out to students, it’s known as an Educational Assistance Payment (EAP). EAPs are taxable, but keep in mind that most students have little income, which means that they’re in low income brackets and won’t face high tax amounts (often receiving their money tax-free).
As for tax breaks for RESPs, Keller reminds Canadians that there are none.
“Payment to an RESP does not save the contributor any personal income tax. A savings tool, like an RRSP [Registered Retirement Savings Plan], however, does,” she says. “Further, an RESP can only be withdrawn without penalty/clawback upon proof of the beneficiaries’ enrolment in a qualified post-secondary institution. This means that what a parent envisioned for their baby’s future with respect to education might not fully align with that future’s reality; creating a possible loss of the full benefit of the grant and investment income earned.”
What Happens to an RESP When You Don’t Pursue Post-Secondary Education?
If a child doesn’t continue on to post-secondary, attends a non-accredited institution, or drops out of their studies early, there are a few things that happen:
- All personal savings (i.e., contribution amounts before any interest) return to the person who opened the RESP.
- The Government of Canada will take back any CESG or CLB contributions.
- Any interest (from either personal savings or government grants or bonds) are returned to the person who opened the RESP (provided all of the RESP beneficiaries, are Canadian residents, and at least 21 years of age, are ineligible for EAP and the RESP is at least ten years old).
- The Government of Canada taxes any interest at the regular income tax rate as well as an additional 20%.
If there is room in your RRSP, the government allows you to transfer up to $50,000 from your RESP to your RRSP without penalty (interest earnings included) as long as the RESP is at least ten years old and its beneficiaries are at least 21.
Bottom Line
No matter your income level, an RESP can be a great way to help your child navigate their future. A small contribution of $5 can still add up and make a difference in their quality-of-life as a student. Plus, even if your child doesn’t end up attending a university, there are still many other institutions that are RESP-eligible.
If you still have questions, it’s a good idea to set up an appointment with your bank, credit union or other RESP provider—they’ll offer this service free-of-charge and will be available to answer any questions unique to your situation.
