RESPs in Canada

A Complete Guide to Saving for Your Child's Education

What Is a RESP?

A Registered Education Savings Plan (RESP) is a government-registered savings account designed to help Canadians save for a child’s post-secondary education. It offers tax-sheltered growth and access to government grants, such as the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB). As they are registered accounts, they come with specific rules, while offering unique advantages not offered through regular savings accounts. [1]

Who Is Involved in a RESP? [2]

Subscriber: Opens and contributes to the plan. Must be 18+, a Canadian resident, and have a SIN.

Beneficiary: The student who receives the funds.

Promoter: The institution that administers the RESP.

Types of RESPs [3]

Individual: plan is directed at a single beneficiary. Direct relationship between the subscriber and the beneficiary is not required for this type of RESP.

Group: plan is directed at a single beneficiary and agreed upon with the promoter. Savings of a Group RESP are pooled with other contributors. Group RESPs are subject to their own rules and are only offered by authorized promoters, such as scholarship plan representatives or group plan brokers.

Family: plan can have multiple beneficiaries. A family RESP is ideal for households with multiple children. However, beneficiaries must be a blood relative or adopted by a living subscriber.

When Can You Open a RESP?

You can open a RESP as soon as the beneficiary has a valid SIN. Starting early helps maximize compounding growth and grant eligibility. [2]

Where Can You Open a RESP?

Financial institutions, such as a bank, credit union, Wealth Management firms, or a group scholarship can offer the savings plan. [3]

Why Should You Open a RESP?

There are multiple benefits for both subscribers and beneficiaries of using a RESP. The two main reasons to open a RESP include: “Free Money” and “Tax-Free Growth.”

The Canadian Government pledged to contribute an additional 20% on top of your contributions to a maximum of $500 a year, with a lifetime maximum of $7,200 per beneficiary. The additional assistance can be invested and grow tax-free in the RESP account over the child’s life, with potentially dramatic results. [4]

How Does a RESP Work? [2]

While the money is invested in the RESP, it grows tax-free. When your child enrolls in a qualifying post-secondary program, the funds can be used for tuition, books, housing, and other costs. One of the biggest advantages is that the government helps you save through grants, most notably, the Canada Education Savings Grant (CESG), which matches 20% of your contributions up to a maximum of $500 per year, with a lifetime maximum of $7,200 per child. No annual contributions limit, lifetime contribution limit of $50,000 per child.

Contribution Limits: No annual limit; lifetime limit of $50,000 per beneficiary.
CESG: Matches 20% of contributions up to $500/year, $7,200 lifetime.

How to Withdraw from a RESP?

The best strategy for withdrawing from a RESP is to take out the grants and earnings first, as these are taxed in the student’s hands, typically at a very low rate due to their minimal income. These are called Educational Assistance Payments (EAPs).

Start using EAPs early in the student’s program to fully benefit from the tax advantage. Your original contributions (which aren’t taxed) can be withdrawn later to cover any remaining expenses. This approach helps minimize tax and ensures government grants are used before they expire or need to be returned. [5]

What happens to unused funds of an RESP?

Unused funds in a Registered Education Savings Plan (RESP) can be handled in several ways under Canadian regulations. Contributors may withdraw their original contributions tax-free, as these were made with after-tax dollars. If the beneficiary does not pursue post-secondary education, up to $50,000 of the accumulated income may be transferred to the contributor’s Registered Retirement Savings Plan (RRSP), provided there is sufficient contribution room, which helps avoid both income tax and a 20% penalty tax on the earnings. If no transfer is made, the earnings are taxed as regular income and subject to an additional 20% penalty. Any government grants received, such as the Canada Education Savings Grant (CESG) or Canada Learning Bond (CLB), must be returned to the government if not used for eligible educational expenses. In a family RESP, unused funds may be reassigned to another eligible child under the age of 21 who is related by blood or adoption. [6]

Regards,

Kinsted Wealth

Disclaimer:

This blog is for informational purposes only and does not constitute financial advice. Please consult a licensed financial advisor or RESP provider for personalized guidance.

Sources: 

[1] ​https://www.canada.ca/en/services/benefits/education/education-savings/resp.html

[2] ​https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps.html

[3] https://www.canada.ca/en/services/benefits/education/education-savings/opening-plan.html

[4] https://www.canada.ca/en/services/benefits/education/education-savings/estimating-amounts.html​

[5] ​https://www.canada.ca/en/services/benefits/education/education-savings/paying-education.html

[6] https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4092/registered-education-savings-plans-resps.html