Josette St-Amand | Tax Specialist, Desjardins Group
The Registered Education Savings Plan (RESP) is highly valued by parents and grandparents who want to give their kids or grandkids a little financial help with their future studies.
Here's the RESP summed up in 10 questions.
1. What is an RESP used for?
The purpose of an RESP is to build up savings to help a child pay for their post-secondary education.
A brief comparison with the Registered Retirement Savings Plan (RRSP):
- Same: the eligible investments are the same and the money earned from them is tax-deferred until it is withdrawn
- Different: the contributions made to an RESP have no impact on a person's taxable income, whereas with an RRSP, taxable income is reduced at the time of contribution and increased at the time of withdrawal
2. Who is the beneficiary?
The beneficiary is generally a child residing in Canada who has been designated for the purposes of the RESP to receive the education assistance payments when they become eligible to do so.
3. Who is the subscriber?
The subscriber is the person who signs a contract with a promoter (for example, Desjardins) to set up an RESP for a designated beneficiary. The subscriber may be a single individual or an individual and their spouse.
Anyone can subscribe to an individual RESP. The subscriber could decide to set up an individual RESP and designate their neighbour's talented child as the beneficiary.
A family RESP is subscribed by a child's parents or grandparents. If the parents are the subscribers, the beneficiaries would all be brothers and sisters. If the grandparents are the subscribers, the beneficiaries could be brothers, sisters and cousins as well.
4. How many beneficiaries and subscribers can there be for each RESP?
A subscriber can set up an RESP for one or more children, or they can set up different RESPs for several children.
There cannot be several subscribers for one RESP, but a child can be the beneficiary of several RESPs created by different subscribers. The applicable limits are calculated by child rather than by RESP.
5. Why are RESPs so popular?
RESPs provide grants based on contributions made by the subscriber. Two such examples are the Canada Education Savings Grant (20% to 40%) and the Quebec Education Savings Incentive (10% to 20%). The rate at which contributions are matched is based on family income. In Quebec, an RESP beneficiary is guaranteed to receive grants worth at least 30% of the RESP contributions.
In families where the adjusted family net income according to the number of children is lower than the threshold determined by the Government, the children can receive a Canada Learning Bond (CLB) even if nobody actually contributes to the RESP. Each child aged 15 or under will receive a $500 bond the year the RESP is opened and a $100 bond, up to a total of $2,000, every year the family is eligible.
6. Who can receive the grants?
Contributions made on behalf of a beneficiary residing in Canada are eligible for grants until December 31 of the year the child turns 17. Restrictions may apply the year the beneficiary turns 16 or 17. Beneficiaries residing in Quebec would be eligible for the Quebec version, based on these same conditions.
7. How much can be contributed to an RESP?
Cumulative contributions made by a single subscriber are limited to $50,000 per child. Penalties apply beyond this amount.
There is no annual limit; however, a contribution of $2,500 per child is enough to be eligible for the basic grants.
8. What are the grant limits?
A maximum contribution of $36,000 is required to reach the cumulative grant limit of $7,200 for federal and $3,600 for Quebec. The annual maximum for basic grants is $500 for federal and $250 for Quebec, which corresponds to a contribution of $2,500.
To make up for years with lower or no contributions, up to $5,000 can be contributed to take advantage of the maximum unused contributions that can be carried forward ($1,000 for federal and $500 for Quebec).
9. When can subscribers withdraw money?
Money can be withdrawn at any time. However, depending on when the money is withdrawn, there could be consequences, for example, loss of eligibility for the grants or even the requirement to reimburse part or all of the grants to the governments.
There are no undesirable consequences if beneficiaries are eligible students when the money is withdrawn, because they will receive taxable education assistance payments made up of grants and investment income. Contributions that are withdrawn are not taxable and the subscriber may choose whether or not to give them to the beneficiary.
To sum up regarding withdrawals:
- For the beneficiary (student), the grants and investment income are taxable.
- For the beneficiary or subscriber, the contributions are not taxable.
- Another beneficiary may be named. If the new beneficiary is a brother or sister, the grants may be kept, subject to certain rules.
- If there is no new beneficiary, the grants are reimbursed to the government and the contributions are returned to the subscriber.
- In terms of the accumulated investment income, the subscriber may cash it in, paying supplemental income tax of 20% on top of the usual income tax. Or they may contribute this income to their own RRSP to defer any tax payment.
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Action plan : Saving for your child's education