As your child or children head back to school in this fall, immediate financial needs aren’t the only academic expenses to consider. Whether your child aspires to one day become a pilot, entrepreneur, scientist, or CPA, their post-secondary education will cost money and it is important to help set your child up for success.
Investing in a Registered Education Savings Plan (RESP) is a good step to support your child’s post-secondary education.
Here are the most common questions and answers about RESPs:
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 amongst 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 Canadian Education Savings Grant (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 plan. 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 risk tolerance before investing in a group plan.
How do RESPs grow?
When started early and contributed to regularly throughout the years, RESPs can enjoy significant growth. Funds in your RESP account can be invested in mutual funds, ETFs, GICs, stocks, bonds, and etc., much like how you’d invest with your RRSP or TFSA accounts. In addition, there are a number of federal and provincial grants available 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 (CLB): 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 (BCTESG): 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.
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 in the year 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 the 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.
Is there a contribution limit?
Your contribution room is accrued each year beginning the year your child was born or 2007, whichever is later, and until your child turns 17. You can contribute a lifetime maximum of $50,000 per beneficiary to an RESP. Note that the amount of annual contribution room that is eligible for the CESG is $2,500. So while you can contribute more than $2,500 a year, the 20% grant is only matched by the government up to the $2,500 per year.
To maximize the CESG, for every beneficiary consider contributing $2,500 a year for 14 continuous years, and then top it off with an extra $1,000 in the 15th year. Note that if you have missed a year or started late, you can always contribute more than $2,500 to retroactively claim grants and that would be eligible to receive an additional $500 per year in CESG (for a total annual maximum CESG of $1,000 per year) if you missed it in a previous 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.