A Registered Education Savings Plan (RESP) is provided by the government of Canada and offers to contribute to your child’s education fund. An RESP can be set up through your local bank, the parent/legal guardian agrees to contribute to the education plan and the government will also co-contribute in form of a Canada Education Savings Grant (CESG) up to a certain annual and lifetime limit.
The RESP is a great tool to take advantage of early because the plan essentially provides free money towards your child’s post secondary tuition (see which type of education programs qualify below). I have encountered many people who believe their children’s education is too far from now to plan for and the money for contributions can be used for more current events such as daycare, diapers, extracurricular activities and more. That is a valid point, however a university or college education will amount to tens of thousands of dollars and even more if your child decides to live on campus, therefore planning ahead for this very expensive investment is essential. It’s a great start to refer to the college tuition calculator to find out how much post secondary education costs today and how much you need to save.
How does it work?
The good part is the contributions can be split up into small payments, whether it’s weekly, biweekly, semi monthly or monthly. You can also make lump sum contributions. Your contributions do not have to be consistent, you may put a hold on for however long you wish, however this will provide for a lower grant payment from the government.
How much will the government contribute?
The government will contribute up to 20% of your annual contributions up to $500 annually per child. If you missed on previous years, the government will pay up to $1000 annually (including the current year payment) to help you catch up. Regardless of the family income, the government will contribute up to a lifetime limit of $7200 per child. That’s $7200 of free money towards each child’s tuition. There is an additional CESG grant that only some families may qualify for because it is geared towards lower income families. Depending on the family income, up to an additional 20% contribution grant can be received from the
So far I’ve introduced the basic CESG and the additional CESG. There is also a Canada Learning Bond (CLB) which helps modest income families start planning for their child’s post secondary education. The CLB provides an additional contribution of up to $2000 and certain criteria must be met before qualifying for the CLB.
Can I invest the contributions?
The better part is you can invest the RESP plan and the investment type is of your choice. The RESP can be invested into mutual funds, stocks, GICs (Guaranteed Investment Certificates) or a plain savings account. The interest and capital gains earned on the RESP is taxed at your child’s hands, which essentially means there are no or very minimal tax implications on the investment income earned since your child will unlikely have taxable income at the time of contribution withdrawal.
Should one child not attend post secondary education, their contributions can be transferred another beneficiary (ex. sibling) in a family plan.
The fund can only be used towards the child’s education and if the child does not attend post secondary education and there is no one else to transfer the contributions to, the government made contributions must be paid back.
In A Nutshell
- as of 2007 and on there are no limits for the contributions made to the RESP, however there is an overall lifetime limit of $50,000
- the contributions made by the parents/legal guardians are not tax deductible
- contributions can be made up to the 31st year of the RESP account age
- the contributions by the government are call CESG (Canada Education Savings Grant) and are paid by the Employment and Social Development Canada (ESDC), regardless of your family income ESDC pays the basic 20% of your annual contributions up to $500 per beneficiary and a lifetime limit of $7200 per beneficiary
- there is also an additional grant that ESDC pays, which is based on family income (see qualifications)
- contributions can be split into weekly, bi weekly, semi monthly or in a lump sum, providing flexibility and control over how much and when you contribute to your child’s education
- the funds can be invested using various investment vehicles such as mutual funds, stocks, guaranteed investment certificates( GICs) or simply left on a regular RESP savings account
- avoid having to spend thousands of dollars last minute, jump start your child’s education plan early and maintain a stress-free, healthy budget
- the grant contributions received from the government are taxed in the child’s hands, since the child will unlikely have income at the time of the contribution payments there is essentially no tax on the grants
Post Secondary Education Includes:
- apprenticeship program
- CEGEP (a publicly funded pre-university college in the province of Quebec)
- a trade school