What is a Registered Education Savings Plan (RESP)?

Saving for your child’s education can’t start early enough. An early start means both your contributions and the grants and bonds you may receive from the government of Canada have more time to grow and compound. While you can make catch-up contributions and may still receive full grants later, the earlier you receive this money and invest it, the longer it has to grow.

Here’s an overview of the features of RESPs, including tax advantages, contribution limits, investment options, withdrawal rules and government grants.

Subscriber

A subscriber is the person who opens the RESP and is usually the one who contributes funds to the plan. Spouses and common-law partners can be joint subscribers.

Beneficiary

The beneficiary is the person — usually a child — who will benefit from the funds to pay for their education. A beneficiary must be a Canadian resident when the plan is opened and have a valid Social Insurance Number. To receive government grants and bonds, the beneficiary must be a Canadian resident and 17 years of age or younger, but plans may be opened for beneficiaries of any age. The RESP can remain open until the end of the 35th year — 40th year when the beneficiary has a qualifying disability — after the plan was opened.

Primary caregiver

This is the person or organization primarily responsible for the care and education of the beneficiary. 

Individual plan

An individual plan has one beneficiary. The subscriber doesn’t need to be related to the beneficiary, but the primary caregiver must be listed on the application.

Family plan

Family members, usually parents or grandparents, can open a family plan for one or more beneficiaries and also add new beneficiaries in the future. Subscribers must be related to all beneficiaries.

One of the big benefits of an RESP is your investments within the plan grow tax-free. While you won’t get a tax deduction for contributions to an RESP, income — including capital gains, dividends and interest — isn’t taxed while in the RESP.

Eventually, money will be withdrawn from the RESP. When that happens, the contributions can be withdrawn tax-free. Funds withdrawn as educational assistance payments (EAPs) to fund education will be taxed in the hands of the beneficiary, as income. As the beneficiary will often be in a low-income tax bracket and have tuition and other personal tax credits available to them, they may be able to reduce or eliminate the taxes owing on the withdrawals entirely.

RESPs offer a wide range of investment choices, including stocks, exchange-traded funds (ETFs), mutual funds, guaranteed investment certificates (GICs), bonds, and certain option strategies. With many products to choose from, it’s important to understand and incorporate your risk tolerance, time horizon, and investment objectives for this registered plan when making any investment choices.

There’s no yearly limit on how much you can contribute to an RESP, although there is a lifetime maximum of $50,000 per beneficiary. The Canada Education Saving Grant (CESG) is calculated as 20% on the first $2,500 of contributions for that year, which would yield a grant of up to $500. 

If you contribute less than $2,500 in a year, you can make additional contributions in a future year to receive unclaimed grants. Up to $1,000 in total grant money can be paid into an RESP in a year.

Something to watch out for: If the total contributions made for a beneficiary in 1 or more RESPs exceed the lifetime limit of $50,000, this is considered an over-contribution. If this occurs, each subscriber will be subject to a penalty tax in the amount of 1% per month on their proportionate share of the over-contribution, until over-contributions are withdrawn.

We’ve summarized the grant details in the following chart, and provided general information on additional CESG and the Canada Learning Bond that may also be received in an RESP.

When it comes time to pay for post-secondary education expenses, funds can be withdrawn from the RESP as Educational Assistance Payments (EAPs). EAPs consist of the income earned within the plan and any government grants and bonds, and the EAPs are taxed in the hands of the beneficiary, as noted earlier in this article.

To qualify for an EAP, the beneficiary must be a Canadian resident for tax purposes, although the qualifying educational institution may be located outside of Canada. Payments may be made while the beneficiary is enrolled in a permitted program at a post-secondary educational institution, which may include a university, college, trade school or apprenticeship program, and up to 6 months after their full-time education ends. In the first 13-weeks of enrollment in a qualifying educational program, EAPs are restricted to $8,000 for full-time students and $5,000 for part-time students.

Contributions can be withdrawn on a tax-free basis, though grants and bonds may need to be repaid if the student does not qualify for EAPs at the time of contribution withdrawals.

If the original beneficiary of the RESP decides not to pursue post-secondary education, the funds may possibly be used for another eligible beneficiary, such as a sibling. Alternatively, if there are no other eligible beneficiaries, the RESP subscriber may be able to collapse the plan and withdraw the funds after a certain time. While the original contributions can be withdrawn without tax, withdrawal of other amounts may be subject to tax and penalties, and government grants and bonds may need to be repaid. Contributing assets that were withdrawn from an RESP to an RRSP may be an option, but there are a number of specific rules and considerations around this decision. We recommend that you consult a tax adviser if you’re considering any of these options.

• RESPs may offer significant benefits as they allow you to save and invest for a child’s education, with the investments growing tax-free. Additionally, government grants and bonds may be available to boost the total amount that builds in an RESP. 
• There may be some flexibility surrounding beneficiaries and use of the RESP funds if the original beneficiary doesn’t attend post-secondary education.
• There are also some limitations and restrictions to be aware of. Contributions aren’t tax-deductible. In addition, there may be penalties for overcontributions, or for withdrawals when beneficiaries don’t qualify for EAPs — and grants and bonds may need to be repaid.
• There are specific rules that govern government grants and bonds, so it's essential to understand these requirements.