How do RESPs work?

What exactly is an RESP?

A Registered Education Savings Plan is a savings vehicle that allows you to put money aside for your children’s post-secondary education or to save for your grandchildren or other relatives.

Not only does the money you deposit in an RESP grow tax-free, but your savings will also be supplemented by Canadian and provincial government grants equivalent to 20% to 40% of your annual contributions, depending on your family income and province of residence.

You have until the end of the 35th year after the RESP was first opened to use the funds, unless your agreement stipulates otherwise. This allows the child beneficiary to take a break from school and work or travel before continuing their education if they so choose—the funds will be waiting for them for when they decide to go back to school.

Who can be a beneficiary of an RESP?

Each RESP must have a designated beneficiary.

The rules are quite simple: the beneficiary can be your child, your grandchild, or the child of a relative or a friend. The beneficiary must be a Canadian resident, have a social insurance number and be pursuing post-secondary education at a vocational school, CEGEP or university.

What are the different types of RESPs?

There are three types of registered education savings plans, so you can choose the one that best meets your needs:

• A family RESP is advantageous for households with several children, as it is the only plan that allows you to name more than one beneficiary. However, every beneficiary needs to be either a blood relative or adopted by a living contributor. If someone passes away, the beneficiary must have been related to the original contributor. You can choose the type of investment in which you wish to deposit your savings.
• An individual RESP, as its name suggests, is for a single beneficiary. This type of plan is ideal for godparents or other important figures in a child’s life, since it does not require a direct relationship with the beneficiary. Here too, you can choose the type of investment you want to hold in your plan.
• This is not the case for a group RESP, where contributions must be made based on the agreement with the provider. This type of plan is also intended for a single beneficiary. But as the name says, your savings will be pooled with those of other contributors. Only scholarship plan representatives (or group plan brokers) are authorized to offer it. Each group plan is different and operates according to its own rules. It's therefore important to have a good understanding of your options to make the right choice.

No one RESP is better than any other. The best plan for you will depend on your situation and goals.

How do I contribute to an RESP?

Who can contribute to an RESP?

A contributor, also known as a subscriber, must be at least 18 years of age, be a resident of Canada, and have a social insurance number.

What is the maximum RESP contribution?

The maximum contribution for an RESP is $50,000 per beneficiary for the lifetime of the plan. There is generally no minimum annual contribution unless the plan you choose requires one.

What are the benefits of contributing to an RESP?

Contributing to an RESP allows you to grow your savings tax-free. What’s more, since this money is intended for a child, the taxable portion of the withdrawal will be allocated to that child, at a much lower tax rate than yours.

Government grants boost your savings

Here’s a quick look at the government programs that will help you maximize your savings:

The Canada Education Savings Grant (CESG) from the Government of Canada:

• Each beneficiary receives a CESG of 20% on the first $2,500 of annual contributions to their RESP, up to an annual maximum of $500. The lifetime limit is $7,200 per beneficiary (even with a group RESP). 
• Subscribers with limited financial means may be eligible for an additional CESG, which represents a supplement of 10% to 20% per year (depending on family income).
• You can also claim unused grant room and contribute more for a given year, allowing you to receive up to $1,000 in CESG per year.
• Every child under the age of 18 (born in 2007 or later) who is a Canadian resident will accumulate $500 in unused CESG contribution room.

The Québec Education Savings Incentive (QESI) from Revenu Québec:

• The QESI is a refundable tax credit equal to 10% of the net annual contributions to your plan, up to a maximum of $250 per year per child.
• A number of accrued rights from previous years, up to a maximum of $500 per year, can also increase the initial amount.
• The maximum lifetime amount awarded is $3,600 per beneficiary.
• Here again, lower-income families are eligible for an additional amount of up to $50 a year.

The Canada Learning Bond (CLB) from the Government of Canada:

• The CLB contributes $500 in the first year, with successive payments of $100 each subsequent year until the child turns 15 years old, if the family income meets the eligibility criteria.
• The maximum lifetime amount awarded is $2,000 per beneficiary.
• The beneficiary must have been born in 2004 or later.

Other provincial education savings incentives:

• British Columbia offers additional grants to people investing in an RESP. Look into what might be available in your province as there are programs that may be of interest to you.

A tax-sheltered investment

Unlike an RRSP, an RESP does not reduce your taxable income. However, the capital you invest generates investment income that accumulates tax-free.

Returns will, of course, vary depending on the financial market and the investment vehicles you choose. But generally speaking, the sooner you start contributing, the higher your RESP returns will be.

When it comes to investments, you have options

Choose the best investment solution for you based on your investor profile by consulting an advisor who can assist in assessing your profile. They can also provide more information about the options available to you. Eligible products include:

• Guaranteed Investment Certificates (GICs)
• Managed solutions and investment funds
• Self-directed investments

What happens if your child decides not to continue their education?

Don’t worry, you won’t lose your investments. If your child decides not to pursue post-secondary education, you will be able to recover all of your contributions.

There will be no additional tax impact, since you will have already paid taxes on the money you invested. That said, any gains and income earned on capital will be taxable at the time of withdrawal.

For example, you could transfer money to your RRSP if you have unused contributions, under certain conditions.

Money you’ve saved in an RESP that won’t be used to pay for education is yours to use as you see fit. However, grant money not used for education will have to be returned to the government.

You can also keep the plan open in case the beneficiary changes their mind. Remember that an RESP can be kept open for up to 35 years!

How do I make withdrawals from my RESP?

Once your child is enrolled in a post-secondary program, they can access the money from their RESP. To start the process, you must contact your provider and send them official proof of enrollment so they can begin making withdrawals.

Education Assistance Payments

The money will be paid out in the form of an Education Assistance Payment (EAP), made up of grant money and investment income (not invested capital). The amount will, of course, depend on the funds you have accumulated in the RESP.

As a subscriber, you may choose to increase the EAP by withdrawing a portion of your contributions as well. Remember, however, that capital can continue to generate returns, even in a period of disbursement. So, it’s a good idea to plan to withdraw grant money first, especially since any grant money remaining after the beneficiary has completed their studies will have to be reimbursed to the government, unless it can be transferred to a sibling under a family plan.

Don’t forget about the tax considerations of your RESP

As mentioned above, money paid out as an EAP is taxable to the beneficiary, whereas the capital you invested is not taxable upon withdrawal.

If the beneficiary has other income, such as a summer job, you should check with an expert to determine if additional money received in the form of Educational Assistance Payments (EAP) will result in taxes payable at the end of the year.

→ For more information, see the table RESPs and income tax produced by the Autorité des marchés financiers, under How do RESP withdrawals work? on the next page:
The Registered Education Savings Plan by the Autorité des marchés financiers

What is the maximum annual withdrawal from an RESP?

There are limits on withdrawals from an RESP at the beginning of your child’s post-secondary education:

• If enrolled as a full-time student, they can withdraw up to $8,000 in EAP during their first 13 weeks of study.
• If they are enrolled part-time, the limit is $4,000.

After the first 13 weeks of study, there is no limit on the amount that can be withdrawn, as long as the beneficiary continues their studies.