RESPs were created to encourage Canadians to save for their children’s post-secondary education. The encouragement comes in the form of the Canada Education Savings Grant (CESG) paid into the plan by the government. With proper planning, the CESG can total $7,200 per child over the lifetime of an RESP.
RESP Basics
RESPs are similar to RRSPs because the investment income earned on your contributions is not taxed until it is withdrawn from the plan. When it’s time to withdraw for university, the money you have contributed is withdrawn tax-free. Money contributed by the government (CESG) and investment income, however, are taxable to the plan’s beneficiary upon withdrawal. Most beneficiaries are students with little other income for the year and will pay little or no income tax on the withdrawal. RESPs differ from RRSPs in that your contributions are not tax-deductible.
CESG Basics
The CESG payment equals 20% of your contributions, and it is paid until the end of the year in which the beneficiary turns 17.
Annual maximum CESG per child: $500
Contribute $2,500 ($2,500 x 20% = $500) per year per child to receive the maximum annual CESG of $500.
Lifetime maximum CESG per child: $7,200
Contribute $36,000 ($36,000 x 20% = $7,200) over the lifetime of the plan per child to receive the maximum lifetime CESG of $7,200. If you contribute $2,500 per year, it takes about 15 years to realize this $7,200.
You can always contribute as much as you like to your RESP, but the maximum CESG a beneficiary can receive per year is $500; however, if you were not able to contribute to the plan during a given year, the government does allow you to catch-up on missed RESP contributions and CESG grants. Under this scenario, the maximum CESG a beneficiary can receive per year is $1,000.
RESP Withdrawals
The balance in an RESP has three components: your contributions, investment income, and CESG money. When making a withdrawal, you choose the components from which to withdraw. Withdrawals from your contributions to the plan are tax-free; withdrawals from investment income and the government’s CESG contributions) are taxable to the beneficiary.
During a student’s very first semester of school, withdrawals from the investment income and CESG sections are limited to $5,000 for full-time students and $2,500 for part-time students.
In order to process an RESP withdrawal, you will be asked to provide proof of enrollment from the beneficiary’s school. This official letter confirming your child’s enrollment is usually available from the Registrar’s office. All post-secondary institutions in Canada are familiar with this requirement for RESP withdrawals.
What if?
What if your child doesn’t attend university?
If you choose to close the RESP, the CESG will be refunded to the government, your contributions will be refunded tax-free, and all investment income will be paid out to you as an Accumulated Income Payment (AIP). AIPs are subject to income tax, plus an additional 20% penalty upon withdrawal from the RESP.
Alternately, taxes may be avoided if the AIP is transferred to your RRSP. You must have sufficient contribution room, and there is a lifetime limit of $50,000 for AIP transfers to an RRSP. Having enough RRSP contribution room to absorb the AIP transfer can be a problem; however, if both parents are RESP account holders, the AIP can be shared between both parents’ RRSPs.
Is an RESP right for your family?
Many people stand to gain by using an RESP to save for education. The CESG program is a valuable benefit for most families.
If you own a business or corporation, however, you may be better off leaving saving for education within your corporation. You should compare the taxes you will pay in order to remove money from the corporation with the anticipated benefit of using an RESP (the 20% government grant). You may be paying more than 20% in taxes in order to remove money from your PC to contribute to an RESP and earn a 20% government grant. If this is the case, an RESP is not right for your family.
We’re here to help you with these kinds of decisions, so do let us know if you’re considering an RESP.