An RESP is a type of investment vehicle designed to help families save for their children’s post-secondary education.
The person who opens an RESP is called the “subscriber”. The children who will eventually use the RESP funds are called the “beneficiaries”.
FAMILY VS INDIVIDUAL PLANS
Anyone can open an individual RESP for a specific beneficiary but only those connected by a blood relationship (such as parents or grandparents) can open a family plan. The advantage of a family plan is that funds can be shared between children according to need, not necessarily equally. For this reason, parents should consider a family plan even if they don’t know if they’ll have more than one child.
HOW MUCH CAN I CONTRIBUTE TO AN RESP?
The lifetime contribution limit per beneficiary is $50,000. There is no annual limit, but a subscriber may wish to contribute in a way that maximizes education grants from the government. A beneficiary can belong to multiple RESPs but the contribution limits apply to all accounts, combined.
CANADA EDUCATION SAVINGS GRANT (CESG)
The Canadian federal government supports families in saving for post-secondary education. They match 20% on the first $2,500 annual contribution per beneficiary, for a maximum CESG of $500 per year. The maximum lifetime CESG is $7,200 per beneficiary.
You can make up missed contributions one year at a time and still get the CESG. For instance, you could contribute $5,000 per beneficiary every other year and get $1,000 CESG per beneficiary.
MAKING PAYMENTS FROM AN RESP
You can start funding your child’s post-secondary education shortly after they begin school. Eligible expenses not only include tuition and books, but other necessary costs such as rent, food, transportation, computer equipment, and more. If the expense is related to education, it’s generally allowed.
HOW ARE RESPS TAXED?
Investments inside RESPs grow tax-free until withdrawn. The following table explains how RESP withdrawals are taxed:
The taxation of RESPs suggests that you should withdraw the EAPs and AIPs when your child has little to no taxable income and save the withdrawal of your contributions for when they might be working part-time and generating taxable income.
HOW LONG CAN RESPS REMAIN OPEN?
RESPs can stay open for 36 years. This gives a lot of flexibility if a beneficiary quits school but resumes education later in life.
WHAT IF THERE ARE UNUSED FUNDS IN YOUR RESP?
You can withdraw your contributions tax free but the unused CESGs must be returned to the federal government. Investment growth can be withdrawn once the beneficiaries are at least 21 years old. Yet, if they are withdrawn, they’re subject to a 20% penalty tax on top of your marginal tax rate.
Fortunately, you have the option to transfer the investment growth to your RRSP to avoid the penalty tax. Be mindful though, this can only be done if you have available RRSP contribution room.
RESPS ARE NOT TRUSTS
If a subscriber dies, the RESP forms part of their estate in accordance with their will. This could pose an issue if a grandparent opens an RESP, doesn’t make provision for it in their will, and dies before the funds are withdrawn. An additional issue that can come up is if only one parent opens an RESP account, dies prematurely, and their spouse isn’t a joint subscriber.
OPEN AN RESP WITH QV INVESTORS
QV offers our clients the opportunity to invest in their children with RESP accounts. To learn more, we invite you to contact your Portfolio Manager or Investment Counsellor at your convenience.