Now that school is back in session, immediate financial needs aren’t the only academic expenses to consider. Whether your child aspires to one day become a doctor, teacher, mechanic, 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 great step to support your child’s post-secondary aspirations.
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 several 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?
Starting early and making regular contributions can help your RESPs grow significantly through compounded return. Funds in your RESP account can be invested in mutual funds, ETFs, GICs, stocks, bonds, etc., much like how you’d invest with your RRSP or TFSA accounts. In addition, there are many 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 in your personal income tax return. 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.
Is there a contribution limit?
Your contribution room is accrued each year beginning the year your child was born, until they turn 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. While you can contribute more than $2,500 a year, the 20% grant is only matched by the government up to $2,500 per year.
To maximize the CESG, consider contributing $2,500 a year for 14 continuous years per beneficiary, 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. These contributions 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 contributions in a previous year.
Contribute by December 31st, 2024 to get the CESG’s 20% matching (up to $500) for the calendar year. Regularly review your funds to ensure you can make your desired contribution.
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.
Tax rules can be complex. This article is not intended as tax advice, and you should not make tax decisions based solely on the information presented. You should seek the advice of a chartered professional accountant before implementing a tax plan or taking a tax filing position.
Author
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.
