RESP’s Explained

Registered Education Savings Program (RESP)

An RESP account is a great way to accumulate and grow assets intended to fund secondary education.  Anyone can open an RESP, be it a parent, grandparent, relative or friend.  RESP’s can be opened under a family plan, for siblings, or as a single plan for one beneficiary.  While opening an RESP for a child is most common, you can also open an RESP and name yourself or another adult as a beneficiary, if further education is intended.

How much can I contribute to an RESP?

Each RESP beneficiary has a lifetime contribution limit of $50,000.  There are no limitations on how much you can contribute in a given year.  Each year a $2500 contribution will attract the federal government grant of $500.

What is the Canadian Education Savings Grant (CESG) and how is it received?

The federal government introduced the Canadian Education Savings Grant (CESG) in 1998.  Basic grant or CESG room accumulates until the end of the year in which the child turns 17 and CESG amounts can be carried forward for use in future years.  Once the RESP is opened, every year the beneficiary can collect two years of unused CESG.  Therefore, if a RESP is opened by the time a child is 8, they could still receive all the available unused basic CESG amounts by the time they are 17 and the final contribution is made.

While there are currently no annual contribution limits, you can receive CESG only on the first $2,500 in contributions per year, or up to the first $5,000 in contributions, if sufficient carry forward room exists. Any contributions over and above these amounts will not receive any CESG for the current year or any subsequent years.

How many RESP’s can a beneficiary have?

It is possible to have multiple RESP’s at different institutions for the same beneficiary, however there is a lifetime contribution limit of $50,000 per beneficiary.

CESG payments are made to a plan on a first-come, first-served basis. Therefore, if a contribution of $2,500 is made through one RESP provider in January, and later in the year another $2,500 contribution is made through a different provider, the CESG will be deposited into the plan where the first contribution is made. When contributions are made on the same date the amounts are split in half between two plans.

What are the benefits or opening an RESP for an adult?

Self-funded RESP’s can be a great investment tool for adults planning to further their education, who haven’t had an RESP in the past.

 

The total lifetime RESP contribution limits of $50,000 apply and the RESP contribution doesn’t affect your RRSP contribution.  RESP contributions are not tax deductible and funds can be withdrawn without at source withholding tax.  Therefore, it may be beneficial to allow funds to grow tax free within the RESP and withdraw when enrolled in a educational program, rather than withdraw from your RRSP.

 

How are RESP funds withdrawn?

 

Once the beneficiary is enrolled in a qualifying post-secondary educational program funds can be withdrawn to support their education costs.

There are two forms of payments.  Education Assistant Payments (EAP) are payments of interest or income and grants.  If the beneficiary is enrolled in full-time post-secondary studies, EAP withdrawals are limited to $5,000 during the first 13 consecutive weeks of enrollment (first year of study only).  After the first 13 weeks of study, any available amount may be withdrawn with proof of continued enrollment.   EAP withdrawals are taxed as income in the hands of the beneficiary. If the beneficiary is enrolled in part-time studies, Educational Assistance Payments are limited to $2,500 for every 13-week period of enrollment (all years of study).

A Post Secondary Education (PSE) withdrawal is the payment of contributions.  There is no limit on the amount of Subscriber (PSE) contributions that can be withdrawn if PSE or contribution amounts are available.  PSE withdrawals are non-taxable.

If the beneficiary requires a withdrawal in excess of the above amounts the RESP provider can submit a request to the Minister of Employment and Social Development for approval. If the request is approved, the provider must then complete a request form on your behalf and submit it to the Canada Education Savings Program.

How are RESP’s taxed?

Assets in an RESP are permitted to grow tax free over the time they are invested.  As there is no tax deduction for the RESP contribution, there is also no income tax due when contributions are withdrawn.  Income and grants withdrawn are taxed in the hands of the student, who often is in a lower tax bracket.

How long can a RESP stay open?

An RESP can remain open for 36 years.  Contributions into an RESP are permitted for 31 years.

What happens if a beneficiary doesn’t pursue secondary education or an RESP is expiring?

If a child chooses not to pursue secondary education or an RESP is expiring, it is still possible to utilize funds in an RESP.

The RESP funds may be used for the benefit of another child within the family.  If the RESP is a family plan, the contributions and income may be used by any of the other beneficiaries, or can be transferred to a new RESP account.  If the new beneficiary has CESG room available, the grant can be transferred to them.  Otherwise the CESG must be reimbursed to the government.

Alternatively, you may be able to transfer up to $50,000 from the RESP to your RRSP if you have RRSP contribution room available, if the RESP has been open for at least 10 years and all beneficiaries are 21 or older and no continuing their education, and if the plan rules permit.

Lastly, you can close the RESP and have the contributions paid out tax free.  While the CESG must be returned to the government, the income or investment earnings can be paid out through an Accumulated Income payment and will be taxed at the subscriber’s income tax level, plus an additional 20 percent.

For more information please visit:

https://www.canada.ca/en/employment-social-development/services/student-financial-aid/education-savings/resp/info.html