The Registered Education Savings Plan (RESP)

An RESP is a registered account designed to help you save for a child’s post-secondary education. Contributions are not tax-deductible, but investments grow tax-deferred until withdrawal.

Opening and contributing to an RESP gives you the opportunity to benefit from government grants. For example, to be eligible for the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB), you must have an RESP. By combining personal contributions with available grant money, you can help maximize post-secondary savings for a child or children.

The RESP is one of several accounts you can use to save toward higher education. Consider combining the savings from your RESP with any funds you can access through a TFSA to maximize post-secondary education savings for a child or children.  

A financial advisor can help you determine how an RESP can fit into your overall plan. 

Anyone (the subscriber) can open an RESP for a child’s (the beneficiary’s) post-secondary education savings. These accounts are commonly opened by parents, grandparents, relatives and family friends. To be eligible, the beneficiary must be a Canadian resident under the age of 31.

There’s no annual contribution limit, but there is a lifetime limit of $50,000 per beneficiary. It’s possible to have more than one RESP for a beneficiary, but the total contribution amount to all RESPs cannot exceed the lifetime contribution limit.

Unlike Registered Retirement Savings Plans (RRSPs), contributions cannot be claimed as a deduction against your taxable income.

You can make contributions to the plan for up to 31 years from the day it was opened.

One thing to be aware of is that you can be taxed on overcontributions. Like with other registered accounts, this tax will apply to each month or part-month your total contributions exceed the lifetime limit of $50,000 per beneficiary. You’ll be taxed 1% per month on your excess contributions.

For example, if you contributed $60,000 to an RESP for one child, you’ll be taxed 1% on the $10,000 you’ve overcontributed. That tax will be applied until the excess contributions is withdrawn. 

Once you open an RESP, you can apply for government grants, such as the CLB and CESG, and provincial benefits, if applicable.

The CLB provides up to $2,000 per beneficiary to help families within a certain income threshold start building education savings. It’s available to children born in 2004 or later and who are under the age of 21. 

The CESG provides an incentive for families to save for post-secondary education by offering a grant based on amounts contributed to an RESP. The government pays a basic CESG amount of 20% on annual contributions, up to a maximum of $500 ($1,000 if there is unused grant room from a previous year), regardless of household income. The beneficiary may be eligible for additional amounts depending on family net income. There is a lifetime maximum CESG of $7,200 per beneficiary.

There are also provincial benefits available if you live in certain provinces. The Québec Education Savings Incentive (QESI) offers a refundable tax credit that’s paid directly into eligible RESPs, up to $250 per year, with a lifetime maximum of $3,600 per beneficiary. Also, the British Columbia Training and Education Savings Grant (BCTESG) provides $1,200 to eligible children. This grant doesn’t require any personal contributions to an RESP, helping families start saving for education. 

Income as well as capital gains earned in an RESP are not included in your annual taxable income for the year in which it is earned. Instead, these amounts can continue to grow and compound inside the RESP tax-deferred until you withdrawal them. If you make a withdrawal for eligible education expenses, they are taxable in the hands of the beneficiary. 

An RESP allows you to invest in a wide range of assets, such as mutual funds and exchange-traded funds (ETFs). However, there are prohibited investment rules and non-qualified investment rules that apply to this account. These rules disallow non-arm’s length investments and investments in assets such as land, shares of private corporations and general partnership units.

Investments that qualify for an RESP:

• mutual funds
• ETFs
• publicly traded securities
• government and corporate bonds
• guaranteed investment certificates (GICs)
• savings deposits
• treasury bills

There are different types of withdrawals, depending on where the funds come from:

• Education Assistance Payments (EAPs): Include money from grants and interest and are taxed in the hands of the beneficiary
• Post-Secondary Education Payments (PSEs): Include contributions from the subscriber; these funds can be withdrawn tax-free
• Accumulated Income Payments (AIPs): Include accumulated interest that has not been withdrawn through EAPs; this can be paid to you, the subscriber, and is taxed at your marginal income tax rate (however, there is an additional 20% tax on these withdrawals, with some exceptions)

To withdraw funds for education, the beneficiary must be enrolled in a qualifying full- or part-time program at an eligible institution. You must then contact your financial institution (RESP promoter) and provide official proof of enrollment. You may also be required to provide receipts for allowable educational expenses.

There are some limitations for the amount you can withdraw:

• Full-time program: $8,000 during the first 13-weeks of enrollment (after that period, there is no withdrawal limit)
• Part-time program: $4,000 for every 13-week period of enrollment 

You can transfer funds from one RESP to another without triggering taxes if the accounts have a common beneficiary or the receiving beneficiary is a sibling. You may be required to repay funds from the CESG and CLB if the transfer occurs to a sibling who is over the age of 20.

You may be able to transfer up to $50,000 tax-free to your or your spouse or common-law partner's RRSP through AIPs. To complete the transfer, you must fill out Form T1171 and provide it to your RESP promoter.

You can also transfer funds from an RESP to a Registered Disability Savings Plan (RDSP). However, there are certain conditions that must be met to qualify for this rollover.

A family RESP allows you to save for post-secondary education for multiple children, allowing you to have more than one beneficiary on the account who are siblings. Unlike individual RESPs, the subscriber must be a parent, grandparent or sibling. Beneficiaries include your children, stepchildren, grandchildren or siblings.

Each beneficiary is subject to the lifetime contribution limit of $50,000 and the individual grant limits of the CESG, CLB and any provincial benefits.

This account can offer flexibility for families; if one child doesn’t pursue higher education, you can re-allocate the funds to another beneficiary.

Your RESP must be closed within 35 years of when you first opened it, by December 31 of that year. When you close the account, contributions will be paid out to you as the subscriber tax-free and any government benefits will be repaid.

AIPs can be paid to you as well (which would be a taxable event, plus the 20% additional tax), transferred to another registered account (which would be tax-deferred) or gifted to an educational institution. 

If you hold the account jointly, by you and your spouse for example, the surviving joint subscriber would become the new holder immediately upon your death. You may also designate a successor subscriber, who would become the new holder if there is no surviving joint subscriber.

If you haven't named a joint subscriber or successor subscriber, there is a deemed disposition at fair market value at the time of your death, which will be taxed as part of the your income for your final year. 

If you’ve moved outside of Canada, you can still continue to make contributions to an existing RESP after moving from Canada and can withdraw contributions tax-free at any time. However, if you close the account, you won’t be eligible to receive AIPs. There may also be tax implications for your country of residence.

If the beneficiary becomes a non-resident, they may not be able to use all the funds available in the RESP. The beneficiary can request an EAP, but withdrawals of investment income and growth will be subject to a 25% non-resident withholding tax rate. Non-resident beneficiaries are not eligible to receive CESG payments, and these amounts will be repaid. Foreign tax policies in the beneficiary’s country of residence may also apply to withdrawals.