The Fundamentals of a Registered Education Savings Plan (RESP)

The main purpose of the RESP is to help families save for a child’s post-secondary education. It has become one of the most popular ways for Canadians to plan for future education expenses by offering tax advantages and government contributions which accelerate the growth of the account.

Eligibility

•    The beneficiary must enroll in full or part-time studies at an eligible school. 

•    Programs must meet the minimum weeks of study and hours per week to be eligible

o    Full-time program in Canada

    A course or program that lasts at least 3 weeks in a row, with at least 10 hours of instruction or work per week.

o    Full-time program outside Canada

    A program at a foreign educational institution with a duration of at least 13 weeks, or 3 weeks for university programs

o    Part-time program in Canada

    An educational program at post-secondary school level that lasts at least 3 consecutive weeks, and requires a student to spend not less than 12 hours per month on courses in the program.

Limits

•    The total contribution limit to an RESP is $50,000 per beneficiary (child)

•    The Canada Education Savings Grant (CESG) provides a 20% matching component on the first $2,500 of annual contributions to an RESP for a total of $500 per year.

o    Lower-income families can receive up to an additional $100 in CESG.

o    The lifetime maximum that can be received from CESG is $7,200 until the age of 17.

o    CESG amounts accumulate and can carry forward to the current year.

•    The Canada Learning Bond (CLB) is available to low-income families, it provides $500 the first year in a RESP, and then another $100 for each eligible year after that until the age of 15, up to a lifetime maximum of $2,000.

o    No contributions are required to receive the CLB.

•    You can make contributions into an RESP until 31 years after it was first opened. You would then have until the end of the 35th year after the plan was first opened to use the funds before the RESP expires (or up to 40 years for a specified plan)

Taxation

An RESP is a tax-deferred savings account. Contributions made to an RESP are not tax-deductible, however, the investments grow tax-free within the plan until it is withdrawn for educational purposes. Once the investments are withdrawn, they are taxed in the hands of the student, who will ideally have a lower income and tax rate and benefit from the tax savings.

If the RESP is not used for educational purposes, you will not be taxed on the amount you contributed to the RESP, but you will have to pay taxes on the money that you earned in your plan as interest. It will be taxed at your regular income tax level plus an additional 20% or 12% if the subscriber lives in Quebec.

Withdrawing from an RESP

There are three different sources of money within an RESP;

•    Contributions

o    These funds can be used by the beneficiary for their education or returned to you tax-free.

•    Benefits received (CLB, CESG)

•    Interest Accumulated

o    Educational Assistance Payments (EAPs) include money from benefits and accumulated interest. EAPs are considered income for the beneficiary and are taxed when taken from the RESP

If the beneficiary chooses not to continue their education right after high school, the RESP can stay open in the case that they change their mind later.

A Registered Education Savings Plan provides many planning opportunities if used correctly. If you have further questions, please feel free to contact us – as always, we are willing and able to assist.

Matthew Gomes, CFP, CIM

Financial Planner, Manulife Wealth Inc