Taking the right steps to grow education dollars with Registered Education Savings Plans 

As the new school year has begun, saving for your family’s post-secondary education may be on your mind. Although RESPs are very beneficial when saving for a child’s education, it can be confusing. I want to break down the basics of an RESP as well as how to effectively withdraw from an RESP to ensure you are getting the most out of its benefits.   

RESPs – the basics

An RESP is a tax-deferred savings plan specifically designed to help families reach education savings goals. In general, it’s most common for parents and grandparents to open an RESP (i.e. to be the subscriber), naming a child or grandchild as beneficiary.

There are two main types of plans: individual and family. With an individual plan, you can name only one beneficiary, and the beneficiary may or may not be related to the subscriber. With a family plan, you can name multiple beneficiaries, but each beneficiary must be related by blood or adoption to the subscriber.

In general, a beneficiary can be any Canadian resident who has a Social Insurance Number (SIN). For family plans established after 1998, each beneficiary must be younger than 21 years old at the time they’re named as a beneficiary. However, if one family plan is transferred to another, a beneficiary who’s 21 or older can still be named as a beneficiary of the new RESP. There are no age restrictions for beneficiaries of individual plans.

5 key RESP details

• The lifetime contribution limit per RESP beneficiary is $50,000. There’s no annual limit, but keep in mind that only a portion of the contribution may be eligible for the Canada Education Savings Grant (CESG).

• Contributions are not tax-deductible, but they can be withdrawn tax-free from the plan at any time.

• The tax on income, gains and government incentives that accumulate within the plan – including the CESG, Canada Learning Bond (CLB, which is a government grant for children of lower-income families) and some provincial incentive plans – can grow tax-free and is deferred until funds are paid out.

• The RESP has to be wound down by the end of the calendar year that marks the 35^th anniversary of the plan opening date (or that marks the 40^th anniversary for a plan with a beneficiary who has a disability).

Benefits of the Family Plan

For family RESPs, a key benefit is that the plan funds don’t have to be paid equally to each beneficiary. If one of your children doesn’t end up pursuing post-secondary education or if each child has different educational costs, there’s flexibility in the amounts that can be paid out to each beneficiary.

This same type of flexibility isn’t available with an individual plan, so it may create an issue if the beneficiary doesn’t go to post-secondary school or doesn’t use all of the funds in the plan, because the income earned in the plan has to be paid to the named beneficiary.

Taking advantage of the Canada Education Savings Grant (CESG)

One of the main benefits of RESPs is a federal government program called the Canada Education Savings Grant. If you save in an RESP for a child who’s 15 years old or younger (specific rules exist for children who are 16 and 17 years old), the federal government will automatically contribute to the RESP via a grant.

Each year, the government will match 20 percent of your contribution, up to an annual maximum of $500 (for a $2,500 contribution), for each beneficiary. If the beneficiary has unused grant room from a previous year, the annual maximum payable is $1,000 (for a $5,000 contribution). The lifetime limit for the grant is $7,200 for each child.

Within a family plan, another benefit is that accumulated CESG contributions may be shared and don’t have to be paid equally among beneficiaries. So, if one of your children goes to a school that’s much more expensive than the other child’s, for example, there’s no requirement that the CESG payouts have to be equal for each child, but only within the limits of the $7,200 CESG per child.

If your child ultimately doesn’t continue their education after high school, this grant money has to be returned to the government.

RESPs as a wealth transfer option

Helping grandchildren or other young family members may be a financial priority for some grandparents or others in their senior years. If you’re someone who feels strongly about passing down wealth during your lifetime and if higher education is a value within your family, contributing to an RESP may be a meaningful and effective way to transfer wealth as part of your estate planning goals.

In general, there are two ways for you to contribute to an RESP as a grandparent: as the subscriber or by gifting funds to your son or daughter to put in an RESP they’ve established for your grandchildren.

For those who prefer to be the subscriber, there are certain advantages to establishing multiple-beneficiary plans. For example, a grandparent can include all of his or her grandchildren from each child in one family RESP.

If you prefer the gifting approach, a main benefit is that the subscriber (the grandparent’s child) is likely age 71 or younger and can transfer the earnings from the RESP to their own RRSP, with certain limits, if one of the beneficiaries does not pursue post-secondary education (if the subscriber is over 71, this option is not available). Keep in mind, however, that the disadvantage is that you, the grandparent, have no control over the funds; in gifting the funds, your son or daughter will control how they’re used, and as the RESP subscribers, they will be able to withdraw the contributions.

Planning for withdrawals

Once enrolled in a post-secondary program, when your child, children or other younger family members who are RESP beneficiaries start needing the funds, the main priority should be structuring the withdrawals in a tax-efficient way.

The income, gains and government incentives that accumulate within the plan – including the CESG, CLB, and some provincial incentive plans – can be grouped together and withdrawn as Education Assistance Payments (EAPs). It’s generally advisable for beneficiaries to receive EAPs first, rather than a refund of contributions. While EAPs are taxable in the hands of the beneficiaries, the taxes are usually minimal – or nil if they’re spread out properly. Another reason to start drawing EAPs early is that if the CESG and income portions remain in the RESP after a beneficiary has completed school, there may be negative consequences when these funds are withdrawn from the plan.

In general, there are four main types of withdrawals:

• EAPs

  • Consist of accumulated income, CESG, CLB, and provincial benefits.

  • Are payable for up to six months after the beneficiary ceases enrollment in an educational program

  • Include a $8,000 withdrawal limit in the first 13 weeks of a full-time post-secondary program or a $4,000 withdrawal limit for a part-time post-secondary program.

  • Are fully taxable to the beneficiary.

  • Beneficiary pays very little tax, if any, since they’re entitled to the tuition tax credit in addition to their basic personal exemption.

• Refunds of contributions:

  • Contributions (principal) can be returned to you, the subscriber or to your beneficiary at any time.

  • A portion of the CESG may be repayable to the government.

  • Not taxable. 

If the RESP continues after the beneficiary leaves post-secondary education, or the beneficiary never ends up attending, the remaining income can be withdrawn as follows:

• Accumulated income payments (AIPs):

  • May be paid out if there’s income earned within the RESP that hasn’t been used by a beneficiary and specific conditions are met.

  • Are fully taxable to the subscriber.

  • The amount subject to tax can be reduced if you transfer up to $50,000 to your RRSP, if you have contribution room.

  • Are subject to an additional 20 percent tax for any portion not transferred to the subscriber’s RRSP or spousal RRSP

• Payment to a designated education institution (DEI) in Canada:

  • A payment made if the RESP has to be collapsed while investment income remains in the plan and the plan doesn’t qualify for an AIP.

  • Not taxable income to you or your beneficiary.

  • Not eligible for a charitable donation tax credit.

 

References

1. “Number of students enrolled in post-secondary institutions in Canada from 2000 to 2017 (in millions),” Statista website, 2019. https://www.statista.com/statistics/447739/enrollment-of-postsecondary-students-in-canada/
   Universities Canada website, “Facts and stats,” page, accessed in February 2019. https://www.univcan.ca/universities/facts-and-stats/

2. Universities Canada website, “Tuition fees by university” page, accessed in February 2019. https://www.univcan.ca/universities/facts-and-stats/tuition-fees-by-university/

3. “Canada Education Savings Grant (CESG) Take-up Rates by Province and Territory,” Government of Canada website, accessed in February 2019. https://open.canada.ca/data/en/dataset/f2113c88-8fed-43bb-9255-968200182e52

4. “Census in Brief: Household contribution rates for selected registered savings accounts,” Statistics Canada website, last modified January 3, 2019. https://www12.statcan.gc.ca/census-recensement/2016/as-sa/98-200-x/2016013/98-200-x2016013-eng.cfm

 

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