Registered Education Savings Plans (RESPs) are the most popular way for Canadians to save for their children’s post-secondary education. On average, student debt currently hovers at $46,000. It’s no surprise, therefore, that more and more young people are turning away from higher education.
Registered Education Savings Plans help parents to save for their children’s education. Parents can choose to save and invest money and equities. They are quick and simple to set up, but there are some important RESP rules and regulations that you should be aware of.
Today, we are going to look at RESP rules in Canada and help you better understand these great investment options.
What is an RESP (Registered Education Savings Plan) & How it Works
A Registered Education Savings Plan (RESP) is a type of investment account. They allow parents to save for their child’s post-secondary education. Contributions are made to an RESP by the subscriber. Under the Canadian Education Savings Grant (CESG), the government of Canada can contribute up to an additional 20% per year in grants. This is up to a maximum amount of $500 per beneficiary per year. The CESG lifetime contribution maximum is $7,200.
An RESP is similar to a Registered Retirement Savings Plan (RRSP) in that savings can grow tax-free. This is because any investment earnings you make will not be subject to income tax. You are also not subject to a withholding tax. For this reason, RESPs are known as tax-advantaged accounts.
You will not have to pay tax on any contributions you make to an RESP. However, any interest you earn will be taxed at your regular rate. Any dividend payments you receive could be eligible for a dividend tax credit, meaning it will not be subject to income tax.
Your investments will continue to grow tax-free until a withdrawal is made. As the person making the withdrawal will be a student, they are likely to be in a low tax bracket, meaning the tax they will need to pay will be minimal.
The RESP money will continue to grow and earn interest until the beneficiary is ready to withdraw it. When the beneficiary enrolls in higher education they can apply to withdraw funds from their account. To make RESP withdrawals, the beneficiary must provide proof of enrollment in a post-secondary educational program.
Educational programs that qualify for an RESP withdrawal include:
- Trade school
- Other institutions certified by the Minister of Employment and Social Development
Withdrawals are known as Educational Assistance Payments. Educational Assistance Payments can be made from the point of enrollment, up to six months after the educational program has finished.
Everything You Need to Know About RESPs in Canada
The subscriber can choose to contribute to an RESP in a variety of ways. Some subscribers choose to open a savings account and contribute money on a regular basis. Others may open an investment portfolio and invest in equities, such as Mutual Funds.
The different investment types that can be held in an RESP, include:
- Guaranteed Investment Certificates (GICs)
- Mutual Funds
- Exchanged Traded Funds (ETFs)
There are three main types of RESPs in Canada:
- Individual Plan
This is an individual investment account opened for one beneficiary. It is designed to help pay for only one child’s education.
- Family Plan
A family plan can name multiple beneficiaries. All of the beneficiaries must be related to (or adopted by) the contributor. If you have more than one child or would like to fund the education of other family members, such as your grandchildren, nephews or nieces, a family plan is the best option for you.
- Group Plan
This involves collecting contributions from multiple investors. When the plan matures, the beneficiary will share the funds with other children. The child will need to begin their higher education at the same time as others in the plan.
Information About Registered Educations Savings Plans (RESPs)
RESP accounts can be opened by any adult who would like to help finance a child’s post-secondary education. This may be a grandparent or another family member, a friend or a neighbour. In order to open an account, the contributor only needs to supply the child’s social insurance number (SIN).
The adult who opens the RESP account and makes the contributions is known as the subscriber. They can choose to contribute on a regular basis, for example monthly or quarterly, or to make irregular contributions.
The company with which you open an RESP is known as the promoter or the provider. They will arrange and administer the RESP and will receive a fee for this service. Providers are usually financial institutions such as banks or credit unions. Investment companies and Robo-advisors can also be providers.
The child for whom the funds are intended is known as the beneficiary. The beneficiary can access the funds to cover costs associates with higher education.
Employment and Social Development Canada (ESDC) are responsible for administering and delivering RESPs in Canada.
RESP Rules and Contribution Limits
If you are considering opening an RESP, there are several rules you should be aware of.
- Who qualifies for an RESP?
To be an eligible beneficiary, the child must be a Canadian resident and have a Social Insurance Number (SIN).
- RESP contribution limit.
There is no annual contribution limit. However, there is a lifetime contribution limit of $50,000 per child. If the child is named as the beneficiary on multiple accounts, the lifetime contribution limit will apply across all of the RESP accounts. This means the total value of all the accounts cannot exceed $50,000.
- RESP time limit
You can contribute to your child’s RESP for up to 31 years. A plan can remain open for up to 35 years. After this time, the money must be withdrawn or transferred to another account.
- Canada Education Savings Grant (CESG) limits.
If you contribute $2,500 annually, the government will contribute an additional 20%. Anything you contribute beyond the $2,500 does not receive additional government contributions. The maximum CESG grant you can receive per year is $500.
If you do not contribute enough money to receive the CESG maximum grant, any unused entitlement can be carried forward to the next year. This is known as the contribution room. Any unused grant money from the previous year is carried forward. The maximum CESG government grant you can receive in one year is $1,000. There is a CESG lifetime maximum of $7,200 per beneficiary.
- Canada Learning Bond.
This is money contributed to the RESP by the Government of Canada. It is intended for children from low-income families. A $500 contribution will be made in the first eligible year. An additional $100 will be contributed every year until the beneficiary reaches 15 years of age. The lifetime limit for Canada Learning Bond contributions is $2,000 per child.
RESPs: Frequently Asked Questions
What Expenses Can Registered Education Savings Plans Be Used For?
The RESP beneficiary can use the funds for any education-related costs. The Canadian government does not specify which expenses are eligible. The beneficiary can make this decision for themselves.
Expenses that the RESP commonly covers are:
- Tuition costs or education payments.
- Living expenses (including rent and utilities)
- Travel (including purchasing a car and paying for insurance)
- Laptop or computer
What is the Minimum Duration of Qualifying Educational Programs?
For your educational program to qualify for an RESP withdrawal, there is a minimum duration for the course of study.
- Full-time courses in Canada – The course of study must be for a minimum of three consecutive weeks. There must also be a minimum of 10 hours of instruction or work per week.
- Full-time course outside of Canada – If you intend to study at a foreign educational institution, the program must have a minimum duration of 13 weeks.
- Part-time course in Canada – The program must be for a minimum of three consecutive weeks and involve at least 12 hours per month of instruction or work.
How Often Can Withdrawals Be Made?
Once you have provided proof of enrollment, the beneficiary can begin receiving their Educational Assistance Payment. Withdrawal rules differ for full-time and part-time education programs:
- Full-time education – During the first 13 weeks in full-time, you can withdraw up to $5,000. After 13 weeks, any amount can be withdrawn from the RESP.
- Part-time education – You can withdraw up to $2,500 every 13 weeks of enrollment.
What Happens if the Beneficiary Doesn’t Pursue Post-Secondary Education?
If the beneficiary decides not to pursue higher education, you have several options available to you:
- Keep the account open.
As RESPs can remain open for up to 35 years, you could choose to keep the money in the account in case the beneficiary decides to begin post-secondary studies at a later date. Your RESP contributions can continue to grow and accumulate interest. Any dividend payments can provide you with extra income.
- Transfer any contributions made to another beneficiary.
You can open an RESP for a new beneficiary or transfer the money to an existing RESP. There are rules and regulations regarding who you can transfer the money to.
- Transfer the money to your Registered Retirement Savings Plan (RRSP)
- Close the RESP
You can keep any money that you have contributed but any money you received from grants must be returned to the government. Money that is withdrawn this way is called an Accumulated Income Payment (AIP).
The Bottom Line
RESPs are a fantastic option to help save for your child’s education in Canada. The provider can contribute up to $50,000 to help support their child in their higher educational studies. Additional funds can also be added to the RESP account from government grants and any capital gains or interest that is earned.
There are some important rules and guidelines that must be adhered to. These relate to how you open an account, how much you can contribute, the grants that you receive and how and when withdrawals can be made.