How RESPs work in Canada

how RESPs work in Canada

Like many newcomers in Canada, you might have heard that Canada offers some programs to help parents financially with their children’s education. One of such programs is the RESP. In this post, we will cover the benefits of the RESP, how RESPs works, how to contribute to it, etc. 

What is an RESP?

RESP is an acronym for Registered Education Savings Plan. RESP is a savings plan that helps you to save for your child’s education after high school. Aside from the savings put into an RESP account, the government also contributes by giving a grant of up to $7,200 over the lifespan of the plan. 

How does RESPs work?

You can open an RESP for a child as soon as they are born. You will need the Social Insurance Number (SIN) to open the account. Parents, grandparents, other relatives and even friends can open this account. So, how does it work?

When you open an RESP account, you can start to contribute some money to it. However, note that the total money you can contribute over the lifetime of the child is a maximum of $50,000. The contributions stop when the child turns 17. As you make contributions to this plan, the government also contributes to your savings through education grants. 

The government via, the Canada Education Savings Grant (CESG) gives 20 cents on every dollar contributes to the child’s RESP, up to a maximum of  $500 on an annual contribution of $2,500. However, the maximum lifetime value the government can provide under this grant is $7,200.

Low-income families might be eligible for more grants via other government programs such as:

1. Additional Canada Education Savings Grant: Families whose household’s annual income is less than $98,040 (2021) are eligible for this grant. 

2. Canada Learning Bond (CLB): Under this program,  $500 in CLB is initially paid into a child’s RESP, and an additional $100 is added each year (if eligible) until they turn 15 for a lifetime maximum of $2,000.

3. Provincial Grants: Some provinces like British Columbia provide grants to encourage eligible residents to save for their children’s education. An example of this is British Columbia Training and Education Savings Grant.

Please visit the Government of Canada RESP page for recent updates and more information on the grants.

Types of RESPs

Now that we know how RESPs work, let’s see the various types of RESPs available. They include:

1. Individual Plan: In this plan, only one beneficiary,i.e, the child is named in the RESP.

2. Family Plan: This plan can have many beneficiaries. Most families with more than one child might prefer to go with this plan. Beneficiaries can share the growth and earnings in this plan. 

3. Group Plan: In this plan, a firm puts together the contributions of various subscribers and offers a group plan to all. The firm manages the investments made in this plan.

How to open an RESP account

You can open an RESP account by contacting your bank, credit union, online broker, financial planner or Robo-advisor and ask them to open a self-directed RESP account. They will require some documentation such as your social insurance number (SIN), your child’s SIN number and your child’s birth certificate. Once the account is open, you can start to contribute some money to it.

RESP Withdrawal Rules

As soon as your child graduates from high school and enrols in a qualifying post-secondary education, they can start to receive funds from their RESP for their education. Before we get to the rules, let’s discuss a few terms that you will see mentioned in these rules:

  1. The Subscriber: this is the person that set up the RESP. 
  1. The Beneficiary is the child for who the RESP was set up.
  1. Post-Secondary Education (PSE) withdrawals: these are withdrawals of the contributions made by the subscriber.
  1. Education Assistance Payment (EAP): this is a withdrawal of the investment earnings and the government grant portions of the RESP. This can only be paid to the beneficiary. The grant portions refer to all the funds received from government programs like the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB), and provincial grants/incentives (including the British Columbia Training & Education Savings Grant), along with any investment income that was earned inside of the RESP.
Here are few rules to consider before making an RESP withdrawal:

  • Post-Secondary Education (PSE) withdrawals are not taxable, so you can make your withdrawals tax-free 

  • Withdrawals of Education Assistance Payment (EAP) are treated as taxable income. The beneficiary will claim the EAP as income on their tax return in the year in which it is received. The financial company that holds the RESP will issue a T4A tax form in the student’s name for EAP payments.

  • Education Assistance Payment (EAP) withdrawals have a $5,000 limit (or $2,500 if the student is enrolled part-time) during the first 13 weeks of schooling. On the other hand, there’s no limit on the amount of Post-Secondary Education (PSE) that can be withdrawn. 
What happens to RESP money if not used?

If an RESP beneficiary does not pursue post-secondary education, there are a few options to consider. They include:

1. Transfering the RESP to another eligible child(the $7,200 lifetime grant limit still applies) without tax consequences if they are under the age of 21. If they are over 21, you may have to pay taxes and return Canada Education Savings Grants  (CESGs) and Canada Learning Bonds (CLBs).

2. Move up to $50,000 to your Registered Retirement Savings Plan (RRSP) or that of your spouse if there’s enough contribution room. 

3. Withdraw your contributions after paying a tax on the investment returns. Also, note that all grant money must be returned to the government.

Before you make your decision, be aware that an RESP account can remain open for 35 years, giving you plenty of time to make a decision. 

To fully understand your options, visit the Canada Revenue Agency (CRA) guide on using your RESP funds.

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