After enjoying the summer, you may notice all the “back-to-school” sales from retailers. August and September are usually the busiest time for parents and guardians to get the essentials ready for the new school year. Looking ahead, many parents should also prepare a plan for the rising cost of education. The Canada Education Savings Program: 2021 Annual Statistical Review summarizes in table 1 that RESP balances and savings rates have been on an upward trend from 2019 to 2021. In Table 2, the take-up rate for the Canada Education Savings Grant has also been increasing and sits consistently above the 50% range. These numbers imply that more Canadians have sought the benefits of the RESP for their children’s education.

Table 1: National summary of statistics - Registered Education Savings Plans

Table 2: National summary of statistics - Canada Education Savings Grant

RESP 101

One of the goals of opening a RESP is to maximize the financial support from the government

The lifetime contribution limit is $50,000 per RESP beneficiary. Although there is no annual contribution limit, there is a cap on government support. The support is called the Canada Education Savings Grant (CESG) and it is limited to $7,200 per beneficiary. On an annual basis, the CESG is calculated at 20 percent of the annual contribution, to an annual maximum of $500. This means a contribution of $2,500 contribution will generate the maximum $500 grant. The CESG is paid to any beneficiary who is 15 years old or under. If an RESP contribution was not made in the previous year, the CESG can be accrued and earned in the current year. In other words, the investor could contribute $5,000 to receive a maximum of $1,000 in grants.  The CESG also has special requirements for children who are 16 and 17 years old. Investors can check the Government of Canada website for more details.

Employment and Social Development Canada also offers a Canada Learning Bond (CLB) that provides additional support for low-income families. This applies to children who were born on or after 2004. Under this program, personal contributions are not required for qualified families.  The first-year support payment is $500 with an additional annual $100 for each eligible beneficiary who is 15 years old and younger. There is a lifetime maximum of $2,000.

If you are planning to open a RESP account, please note that the contributions are not tax-deductible. The beneficiary also needs to be a resident of Canada with a valid Social Insurance number.

The RESP is a tax-deferred investment account in which you do not have to pay taxes on any growth until you start withdrawing. When the money is withdrawn, all gains are taxed in the hands of the child or beneficiary. In some cases, the student is attending school full time and may have a very low income. This implies they would fall into a low tax bracket, which would attract little to no taxes

Withdrawal strategies

When making withdrawals, the income and gains and the CESG payments are referred to as an Educational Assistance Payment (EAP). Starting in 2023, a new EAP rule only permits the beneficiary to withdraw up to $8,000 in the first 13 weeks of enrollment in a qualifying educational program. There is no EAP withdrawal limit after the first 13 weeks. If the beneficiary does not withdraw all the EAP before graduation, there may be some unwanted negative tax impacts when the remaining EAP is withdrawn. Hence, it is advisable to consider drawing the government grants and income/gains from the account first.

The timing of the withdrawal and the investment plan should be personalized according to the contributors’ requirements. We encourage you to consult with your tax advisors and investment professionals to craft a detailed plan for your education savings goals.