RESPs: Educating Little Ones a Family Priority

Summer time is family time—and a good opportunity to review the funding of education for little ones. In this RESP review, the object is for advisors, parents, and grandparents to consider whether this registered plan is the right one for your new addition.

The Registered Education Savings Plan (RESP) is a lucrative savings plan because earnings within the plan are deferred until the beneficiary goes to school, but also because of the Canada Education Savings Grant (CESG). This is a contribution the government makes when you invest in the RESP. It’s 20% of your annual contribution for each beneficiary, to a maximum grant of $500. ($1,000 if you have unused grant room from a prior year.) 

The maximum lifetime CESG for each beneficiary is $7200, and beneficiaries qualify for the grant until the end of the calendar year in which they turn 17. However, you must start saving in the RESP before the end of the calendar year in which the beneficiary turns 15 to be eligible for the grant.

Since 2009, an additional CESG is available on the first $500 contributed to the RESP for lower income families. The qualifying net income mirrors that used for the Canada Child Tax Benefits and there are minimum contribution rules for these purposes.   In addition, lower income families can tap into the Canada Learning Bond (CLB). Here, the government contributes the first $500 to the plan and pays an extra $25 for account opening charges. After this the CLB pays an additional $100 per hear for up to 15 years in each year the family is entitled to receive the National Child Benefit.  

There is no annual RESP contribution limit, no tax deduction results from the contribution, and there is a lifetime maximum of $50,000 per beneficiary under age 31. A family plan allows you to name more than one beneficiary, who must be related by blood or adoption and is under the age of 21 (the age limit is ignored when funds are transferred from one plan to another).

When the student later attends post-secondary school, the CESG, CLB, and the accumulated earnings—which have been accumulating on a tax-deferred basis along the way—are withdrawn in the hands of the student as Education Assistance Payments (EAPs), funding education often at little or no tax cost because the student’s marginal tax rate is usually low.  

There is a downside to the RESP, however. If the student does not attend post-secondary school, the grants and bonds must be returned to the government and the balances in the account are returned to the subscriber as Accumulated Income Payments (AIPs). Principal contributions are returned on a tax-free basis, but the AIPs must be included in income. In addition, the AIPs are subject to a surtax of 20%, unless the recipient contributes them to his or her RRSP.