Registered Education Savings Plan (RESP)

The Registered Education Savings Plan is a unique type of savings account. Contributions to an RESP are not tax deductible; however, capital gains and income earned on contributions grow tax-deferred until withdrawn.

You can set up either an individual plan or a family plan and a plan can be set up by anyone, whether it’s a parent, grandparent, uncle, aunt, etc., and that person is known as the subscriber. Under a family plan, one or more children can be named as beneficiaries, but they must be related to the subscriber in some way (eg. children, adopted children, grandchildren). Under an individual plan, there is only one beneficiary, and he or she does not have to be related to the subscriber. The beneficiary must be a resident of Canada and needs to have a Social Insurance Number (SIN). The lifetime limit for contributions for the plan is $50,000 and there is no annual limit.

The federal government gives an incentive to open this plan by providing bonus payments from the Canada Education Savings Grant program (CESG). Grants are worth 20% of the first $2,500 in annual RESP contributions, up to a lifetime limit of $7,200 per child. Contributions can be made until the end of the year that the child turns 17. If you’re starting late, the government lets you catch up past contribution room. The restriction is that you can only go back one year at a time. For example, an RESP is set up for Tommy when he is ten years old. The subscriber can make contributions of $5,000 per year (the current year’s contribution of $2,500 and one previous year of $2,500) for the next seven years, totaling $35,000, and receiving a CESG total of $7,000.

There are several factors to consider when investing in an RESP, however the most important is the child’s age. The younger the child, the better to maximize the compounding effect of tax-deferred growth inside the plan. Starting the plan early also gives you a longer timeline so that you can build a more growth-oriented portfolio. Investing in the equity markets through mutual funds† or any investments that can be held within a Registered Education Savings Plan may enable you to obtain a higher rate of return than from a guaranteed product. There is no foreign content limit and how the funds are invested is your decision.

Withdrawals can start as soon as the student is enrolled in a qualifying post-secondary educational program. Qualifying programs include trade schools, apprenticeship programs (lasting a minimum of six weeks), colleges and universities. The original contributions come out tax free but any growth and grants are fully taxable. When the money eventually is withdrawn to pay for education expenses, (known as Education Assistance Payment – EAP), those funds are taxable income to the student (who likely has little other income and additional deductions for tuition, books, etc. and therefore may pay little or no tax).

†Mutual funds and related financial planning services are offered through Credential Asset Management Inc.

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