The new school year is well underway, and it’s a year drastically different from previous years. While the way children are being educated will continue to vary depending on COVID-19 measures, the importance of investing in registered education savings plans (RESP) remains constant. Whether you already have a RESP plan in place or have yet to start one, if you intend to support a child’s future post-secondary education, this article will provide you with helpful information.
What are the different types of RESPs?
There are three different types of RESPs you can purchase: Individual, family, and group.
- Individual RESPs
This is a great option for single-child families, or if you are sponsoring a non-relative such as a godchild.
- Family RESPs
For families with more than one child, this could be an ideal option as the funds can be shared among the children. In a family plan, all beneficiaries must be related to you – either by blood or adoption. Beneficiaries can be added or changed over time, which is great if you have more children in the future, or have children who choose to not attend post-secondary.
When the RESPs are paid out, the funds do not have to be split equally, which is useful in situations where post-secondary education costs between children differ. However, since the CESG contributes a lifetime maximum of $7,200 per beneficiary, this allocation must be respected when dividing RESP funds among beneficiaries.
- Group RESPs
In a group RESP program, your funds are pooled with a number of other RESP accounts in a group investment situation. The benefit of this, is that your investment has the potential to grow larger than it would in an individual or family plan.
When you join a group plan, you agree to purchase a set number of plan units, which represents your shares. Your child’s birth date determines the maturity date of your plan and you commit to making regular contributions according to a pre-determined schedule.
It's important to note that group plans come with many risks that are not associated with individual and family RESPs. We recommend carefully considering your tolerance for these risks before investing in a group plan. We will discuss these risks later in the article.
How do RESPs grow?
When started early and contributed to regularly throughout the years, RESPs can enjoy significant growth. In addition to growing from your contributions and interest from your financial institution, there are a number of federal and provincial grants that will add to RESPs over the years.
These include the following:
- The Canadian Education Savings Grant (CESG): The CESG contributes $7,200 over an RESP’s lifetime. It does this through matching 20% of your contributions each year (up to $500).
- Additional Canada Education Savings Grant (A-CESG): Depending on your income, you may receive 10 to 20% more on the first $500 you contribute each year (up to $100 annually).
- Canada Learning Bond: To help low-income families get started with education savings, the Government of Canada will make an initial deposit of $500, and top this up with annual deposits of $100 until the plan’s beneficiary turns 15 years old.
- British Columbia Training and Education Savings Grant: This one-time grant of $1,200 can be received if you apply when your child is between the ages of six and nine-years-old.
Where do you open an RESP account?
Individual and family RESPs can be purchased through a financial institution such as a bank or credit union – or else through a scholarship plan dealer, which is an organization that specializes in administering RESPs.
When signing with a scholarship plan dealer, you allow the dealer to make all investment decisions, whereas other financial institutions will often allow you to self-direct your RESP investments. Group plans can only be administered through a scholarship plan dealer.
As mentioned, before investing in a group plan, you should carefully consider the risks involved to gauge whether your situation will align with the group regulations. In group plans, you make regular contributions according to a pre-determined schedule. If you miss a contribution, you may be charged a penalty and/or interest on the missed contribution. Your account may also be terminated – if this happens, you will have to give up some, if not all, of your investment earnings.
However, the advantage to investing in a group RESP account, is that your account is pooled with others in a group investment situation. Therefore, your investment has the potential to grow larger than it would in an individual or family plan.
How are RESPs taxed?
Unlike RRSP contributions, you cannot deduct your RESP contributions from your income tax. However, RESP funds remain tax-sheltered until withdrawn in the future. The initial contributions, known as Post-Secondary Education Payments (PSE), can be withdrawn without any taxes owing.
The government grants and accumulated income, known as Education Assistance Payments (EAPs), will be added to your beneficiary’s income after they’ve been withdrawn and then taxed accordingly. Since most students have limited incomes, your beneficiary will likely end up paying little to no taxes on their EAPs.
Regardless of which type of RESP account you purchase, December 31 is the deadline for contributions to be eligible for the CESG’s 20% matching (up to $500) for this calendar year. While that is still a while from now, it’s good to start reviewing your funds to make sure you have enough set aside to make your desired contribution for this year.
Talk to a financial advisor or a Chartered Professional Accountant for further guidance on RESPs and other ways to save for your child’s future.
Shane Schepens, CPA, CA is a Partner at Clearline CPA. Shane’s focus is on Canadian tax planning, such as reorganizations, estate, and succession planning for medium and small private companies. Shane is a member of the CPABC Taxation Forum. Visit our personal finance section for more tax-related tips.