What is an RESP?
The Registered Education Savings Plan (RESP) is a tax-sheltered investment vehicle that allows parents to save for their child’s post-secondary education. The primary advantage of using an RESP is access to the Canadian Education Savings Grant, Canada Learning Bond, and tax-deferred investment earning.
How does it work?
Funds are invested in the RESP as contributions by the subscriber (ie: the parents). There is a maximum lifetime contribution limit of $50,000 per beneficiary. Note that these contributions cannot be deducted from your income on your tax return. RESP contributions can be invested into any type of savings plan, such as savings account, term deposit or mutual funds. The interest gained on RESP investments is tax-sheltered until the time they are withdrawn.
Funds from the RESP are paid to the beneficiary (the student) as Education Assistance Payments (EAP). These are considered taxable income, although generally the beneficiary’s student tax credits will offset the income so that very little tax (if any) will be owed to the CRA. The one exception is if any of the original principle contribution is withdrawn as part of the EAP, in which case this amount was already taxed prior to being contributed and would not be subject to further tax.
With RESP Family Plans, the funds can be shared between multiple beneficiaries, allowing for more flexibility if children choose to pursue different types of post-secondary education where there is a difference in cost, or if one child chooses not to pursue further education.
If any of the principle contribution is left at the time the contract ends (35th anniversary), or the beneficiary finishes schooling, the remainder will be refunded to the subscriber tax-free.
Any unused interest that was gained on the investments will also be paid out, although it will be subject to taxes (the tax owing can be reduced if the income is transferred to an RRSP). Unused grants must be repaid to the government.
Why use an RESP?
RESP provides tax-deferred earnings for investments, and since the income is paid to the student, they will owe little to no tax. The government offers a Canadian Education Savings Grant (CESG) for those who use an RESP. The CESG will match 20% of the first $500 contributed each year for beneficiaries under the age of 18, up to a maximum grant of $7200. The grant proceeds are invested along with your contributions, which means increased compound interest growth.
Children of modest income families are also eligible for the Canada Learning Bond, which provides $500 at the time an RESP is opened, plus an addition $25 to assist with admin costs, and then an additional $100 for each year they remain eligible (regardless of the amount contributed to the plan) up to a maximum of $2000.
Learn more on the Canadian Government website: https://www.canada.ca/en/employment-social-development/services/student-financial-aid/education-savings/resp.html