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From UFile's tax expert Gerry Vittoratos.

Registered Education Savings Plan (RESP)

Apr 4, 2023 by Gerry Vittoratos
An RESP is a registered account that allows you to save money in a tax-efficient way for your children’s post-secondary education. What does it entail, and why is it such a great financial tool? Let’s find out.

What is an RESP?

A Registered Education Savings Plan (RESP) is a tax-sheltered account that allows you to save money for your children’s post-secondary education. While contributions to an RESP are not tax deductible, the gains earned within the account are tax-sheltered (as for an RRSP and a TFSA). Moreover, the federal government will add a contribution for every dollar you put into the plan.

When your child enrolls in a post-secondary education program, they can start pulling out of the plan to pay for their tuition fees.

How do contributions work?

Contributions to the plan are made by a subscriber (parent of the child) to a promoter (financial institution) for a beneficiary (child). There are individual plans (single beneficiary) and family plans (multiple beneficiaries).

As mentioned, contributions into the plan are not tax deductible; however, the earnings within the plan accumulate on a tax-free basis. The contributions and accumulated earnings can stay in the account for up to 35 years after the plan is established.

You can buy the same types of investments in an RESP that you would buy in an RRSP or a TFSA.  

The lifetime contribution limit per child is $50,000.

And the government adds to my contributions?

Yes. In addition to the tax deferral on earnings, another major benefit of contributing to an RESP is the Canada Education Savings Grant (CESG). Simply put, the CESG is an amount paid by the federal government for every dollar contributed into the RESP. The basic grant is 20% of the current year contributions up to a maximum of $500 per beneficiary. This translates to a yearly contribution maximum of $2,500. The lifetime CESG limit is $7,200. An additional grant of 10% or 20% is given to low-income families.

The table below summarizes the grant amount (2022 tax year):

 

CESG

 

Family net income of $50,197 or less

Family net income of more than $50,197 but less than $100,392

 

Family net income of more than $100,392

Basic CESG on the first $2,500 of annual RESP contributions

 

20% =$500

 

20% =$500

 

20% = $500

Additional amount of CESG on the first $500 of annual RESP contributions

 

20% =$100

 

10% =$50

 

Beneficiary is not eligible

Maximum yearly CESG depending on income and contributions

 

$600

 

$550

 

$500

Lifetime maximum CESG for which you may qualify

 

$7,200

 

$7,200

 

$7,200

Depending on your province of residence, you might qualify for an additional grant.

On top of the CESG, the federal government provides an additional amount for low-income families in the form of the Canada Learning Bond (CLB). The main difference with the CESG is that no contribution is required to get the CLB; it is deposited directly into the RESP account. An initial payment of $500 is made for the first year that the child is eligible, then $100 is deposited for each additional year of eligibility, up to age 15, for a maximum of $2,000. For 2022-2023, the income eligibility threshold is $50,197 for up to 3 children, and it increases with each additional child.

What happens when my child starts withdrawing from the RESP?

Since the contributions did not benefit from a tax deduction (in other words, after-tax dollars were contributed), they can be withdrawn tax-free to the subscriber (parent of the child) or to the beneficiary (child). These are called “refunds of contributions.”

Payments of the Canada Education Savings Grant, Canada Learning Bond and accumulated earnings are called Education Assistance Payments (EAP) and made to beneficiaries (children). These payments are taxable in your child’s tax return.

Although the income received by the student is taxable, your child will likely have little to no other income to declare while attending school full-time; therefore, these payments will be subject to a low-income tax rate.

To be eligible for an EAP, the recipient must be enrolled in a qualifying or specified educational program. A qualifying educational program (full-time) is a program at post-secondary school level that lasts at least three consecutive weeks and requires a student to spend no less than 10 hours per week on courses. A specified educational program (part-time) is a program at post-secondary school level that lasts at least three consecutive weeks and requires a student to spend no less than 12 hours per month on courses. For the specified program, the child must be at least 16 years of age.

EAP withdrawals are limited as follows:

  • qualifying educational program – $5,000* for the first 13 consecutive weeks in such a program. After the student has completed the 13 consecutive weeks, there is no limit on the amount of EAPs that can be paid if the student continues to qualify to receive them;
  • specified educational program – $2,500* for the 13-week period ending at the time of payment whether or not the student is enrolled in such a program throughout that 13-week period.

*As per Budget 2023, EAP withdrawal limits will increase to up to $8,000 in respect of the first 13 consecutive weeks of enrollment for beneficiaries attending full-time programs, and up to $4,000 per 13-week period for beneficiaries enrolled in part-time programs.

The winning combination for your child’s education

The benefits of an RESP are clear:

  • the gains within the plan are tax sheltered
  • the government gives you additional grants for every dollar contributed
  • the withdrawals of the capital contributed are tax-free
  • the withdrawals of the gains and grants are taxable in the hands of the child, who pays minimal tax

In light of these factors, if you have funds to spare, consider investing in an RESP as it is an essential tool to plan ahead for your children’s future education.

 

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Presented by UFile's tax expert
Gerry Vittoratos
MTax

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