A Registered Education Savings Plan is the primary tool available to Canadians to help them save for education expenses. An RESP is most commonly used for the benefit of children or grandchildren, though they can be used for anyone, including immediate family members – for clarity, referred to as “students” in this post.
An RESP has two primary benefits. First, like an RRSP or TFSA, the funds inside an RESP are tax-sheltered. This means that there is no tax on the investment income earned as long as it remains in the plan. This allows the investments to grow more quickly as the growth is not eroded by taxes – though there are taxes due on withdrawals, which we’ll get to later. The second benefit is that contributions to an RESP are partially matched by the government, increasing the value of any contributions made.
There are a number of important points to keep in mind about the RESP:
- If your family income is around $97,000 or higher, the government grant is 20% of the value of your contribution, up to a contribution of $2,500 per year, per student, equaling $500 grant per year per student. If family income is lower, the first $500 are matched at a higher percentage, according to the table below.
- The grant is determined on a calendar year basis, and only one missed year of grant can be made up per year. If not making up for a missed year, you can contribute more than $2,500 (up to the lifetime maximum of $50,000 per student), but you will only receive grant as if you contributed $2,500.
- Depending on your family income and the number of children you have, you can also qualify for the Canada Learning Bond, which is a one-time government contribution towards an RESP. For most families, family income needs to be below $50,000 to $60,000.
- The RESP is flexible with regards to approved post-secondary education. Universities, colleges, and trade schools, whether in Canada or elsewhere, all meet the criteria. Part-time study is also permitted as long as the student spends 10 or more hours per week on the program or coursework.
- Generally, RESP funds can be used to pay for any expense as long as the student continues to be enrolled, including tuition, textbooks, rent, food, etc.
- If withdrawals are very large, the financial institution administering the RESP might request documentation or receipts detailing the expenses
- The financial institution tracks the values of contributions, grants, and investment earnings in the plan as they are taxed differently. Contributions are non-taxable on withdrawal, and grants and investment earnings are taxable as income for the student, who generally pays little or no tax depending on their income.
- If the student decides not to attend a post-secondary institution, there are a few options. If there are other students (usually siblings) in the RESP, then the funds can be used for the siblings’ education. If that’s not possible, and the RESP must be collapsed or withdrawn from early, then each type of funds within the RESP are treated differently:
- Any grant or bond received is forfeit and returned to the government.
- Contributions are returned to the RESP holder (usually parents) tax-free, as the contributions were already made with after-tax money.
- Investment earnings, or profit, are taxed as income plus an additional 20% penalty. If you have the RRSP contribution room and meet a few criteria, up to $50,000 can be rolled into an RRSP without being hit with taxes on those amounts.