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RESPs and saving for your children’s education in Canada

A big part of helping your kids achieve their dreams is preparing for the rising cost of post-secondary education in Canada.

In 2020/2021, the average undergraduate tuition reached $6,580, up 1.7% from the previous year. That’s nearly $28,000 to put one child through a four-year program – not including expenses for rent, food, books and transportation, which can quickly add up. To accommodate these costs, many students take out loans and end up with large amounts of debt, sometimes well into adulthood. A Registered Education Savings Plan (RESP) is one of the best ways to help alleviate this financial burden for your children.

What is an RESP?

A RESP is an account designed to help you save for a child or grandchild’s education, tax-free, with added contributions from the government. RESP rules limit contributions per child to a lifetime total of $50,000. You can use RESP funds to pay the costs of full-time or part-time programs, including:

  • Apprenticeship programs
  • CEGEPs (general or vocational college in Quebec)
  • Trade schools
  • Colleges
  • Universities

What are the main RESP benefits?

If you’re wondering whether or not an RESP may be the right education fund for your family, consider that RESPs include two powerful benefits to boost your savings:

1. Government Grants

Through the Canada Education Savings Grant (CESG), the federal government matches up to 20% of your RESP contributions – to a maximum of $500 per child, per year – until your child turns 17. Therefore, if you invest $2,500 in an RESP account, the government will contribute the yearly maximum of $500. You may be eligible to access additional grants through the Canada Learning Bond (CLB) and other provincial educational savings programs.

Your child is eligible for the CESG up to and including the year they turn 17. The plan must contain at least $2,000 in contributions or have annual contributions of at least $100 in any four years before December 31 of the year they turn 15 to receive the grant at age 16 and 17.

2. Tax-deferred investment growth

RESP contributions benefit from tax-free growth over the life of the plan. And, as with RRSPs and TFSAs, RESP investments can include different types of mutual funds to match your risk tolerance and timelines. When your child withdraws the money to pay education expenses, they will only be taxed on the investment growth and grant portions of the plan. With a limited income while pursuing their education, their tax rate is likely to be low.

Looking for answers to common RESP questions?

Can I open an RESP for more than one child?

While you can open an individual plan for each child, it may be in your interest to open a family RESP if you have multiple children. Family RESPs, which hold the cumulative lifetime limit for each beneficiary, let you determine how to divide the funds among the beneficiaries. Of note, if one of your kids decides not to pursue their education, the full value of the fund can be directed to their siblings. You can also choose a group RESP (for single or multiple children), whereby your money is pooled with other investors. These plans are generally more restrictive than individual or family plans.

How can my child access their RESP funds for school?

When your child begins their post-secondary education, they can withdraw money from their RESP in two ways:

  1. They can take out any contributions made by their parents (or other subscribers), which will not be taxed upon withdrawal.
  2. They can receive Educational Assistance Payments (EAPs) – which include the CESG, savings from provincial programs, the CLB, and any investment growth that has accumulated inside the RESP. EAPs are taxed as income in the hands of the student that receives them. To receive EAPs, they will need to provide proof of enrollment in qualifying educational program and complete an RESP withdrawal form. EAPs are limited during the first 13 consecutive weeks of enrollment to $5,000 for full-time studies and $2,500 for part-time studies.

What if my child doesn’t start post-secondary school immediately after high school?

While government contributions stop when your child reaches age 17, the funds do not have to be used right away. The plan can stay open until the end of the 35-year anniversary of the plan’s opening. However, you can only invest in an RESP until the 31-year anniversary of the plan’s opening. The money will continue to grow, tax-free, until it’s needed.

What if my child chooses not to pursue post-secondary education at all?

You can opt to close individual plans for beneficiaries who do not further their education, and get a refund of contributions (ROC), tax-free. You will, however, forfeit all the government grants the plan received. For individual RESPs that have been open for 10 or more years, you can transfer your investment earnings to an RRSP, if you have eligible contribution room. If not, you can withdraw the earnings as an Accumulated Income Payment (AIP), which will be subject to regular income tax and an additional 20% tax. You may also be eligible to transfer a portion of the closed RESP money to a sibling’s plan. For group RESPs, investment earnings must remain in the plan for other plan members to use.

Are my contributions to an RESP tax-deductible?

No. While RESPs provide tax-sheltered growth on your contributions (as well as the government grants), you contribute after-tax money to these accounts.

Is there a limit to RESP contributions?

RESPs do not have a yearly contribution maximum. They do, however, have a lifetime limit of $50,000 per child. Any contributions over this limit are subject to a 1%-per-month penalty tax.

Who can contribute to an RESP account?

Anyone – including grandparents, other family members and close friends – can contribute to a child’s RESP. But all contributors will need to obtain that child’s social-insurance number to do so. All contributions, whatever their source, will count toward the beneficiary’s lifetime limit.

Starting an RESP in Canada

Getting started is easy. To open an RESP account with a financial-services provider of your choice, you’ll need the child’s social-insurance number. Generally speaking, your provider will apply for the government grants, which will be deposited in your account after you make your contributions.

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The information contained in this communication was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This communication is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds. Mutual funds are offered through Co-operators Financial Investment Services Inc. to Canadian residents except those in Québec and the territories. Co-operators Financial Investment Services Inc. is committed to protecting the privacy, confidentiality, accuracy and security of the personal information that we collect, use, retain and disclose in the course of conducting our business. Please refer to our privacy policy for more information. Co-operators® is a registered trademark of The Co-operators Group Limited. © 2022 Co-operators Financial Investment Services Inc.