2.05 million. That’s the approximate number of students who were enrolled in post-secondary education across Canada during the 2017-2018 school year.1 For current students, tuition fees alone for most schools can range anywhere from about $2,500 all the way to over $8,000 per year, depending on the type of program and institution (not to mention the costs of books and supplementary materials, housing and meals).2 All in, the total really adds up—and these are today’s costs.
So why is it that despite an ongoing trend of more individuals pursuing post-secondary education and despite education costs being on a steady incline over the years, still only about half of Canadian families are contributing to a Registered Education Savings Plan (RESP) and receiving the Canada Education Savings Grant (CESG) for a child who’s 17 or under?3
When it comes to saving overall, it seems many Canadians put a heightened focus on saving for retirement, and data indicates there’s a larger percentage of individuals who contribute to Registered Retirement Savings Plans (RRSP), Tax-Free Savings Accounts (TFSA) or Registered Pension Plans (RPP) than those who contribute to an RESP.4 With savings focus turned elsewhere, some may also simply not be aware of the specific benefits and value an RESP offers.
Whether you’re a current or a soon-to-be parent, a grandparent or another family member, the current costs of post-secondary education—and what those costs may end up being in 5, 10 or 15 years—may be reason enough to put greater attention on an RESP as a savings option. And beyond the value of simply establishing an RESP, understanding how it works, how to choose the right one and how to use it effectively can go a long way in helping to grow and maximize a child’s education dollars.
An RESP is a tax-deferred savings plan specifically designed to help families reach education savings goals. In general, it’s most common for parents and grandparents to open an RESP (i.e. to be the subscriber), naming a child or grandchild as beneficiary.
There are two main types of plans: individual and family. With an individual plan, you can name only one beneficiary, and the beneficiary may or may not be related to the subscriber. With a family plan, you can name multiple beneficiaries, but each beneficiary must be related by blood or adoption to the subscriber.
In general, a beneficiary can be any Canadian resident who has a Social Insurance Number (SIN). For family plans established after 1998, each beneficiary must be younger than 21 years old at the time they’re named as a beneficiary. However, if one family plan is transferred to another, a beneficiary who’s 21 or older can still be named as a beneficiary of the new RESP. There are no age restrictions for beneficiaries of individual plans.
5 key RESP details
- The lifetime contribution limit per RESP beneficiary is $50,000. There’s no annual limit, but keep in mind that only a portion of the contribution may be eligible for the Canada Education Savings Grant (CESG).
- Contributions are not tax-deductible, but they can be withdrawn tax-free from the plan at any time.
- The tax on income, gains and government incentives that accumulate within the plan—including the CESG, Canada Learning Bond (CLB, which is a government grant for children of lower-income families) and some provincial incentive plans—can grow tax-free and is deferred until funds are paid out.
- The RESP has to be wound down by the end of the calendar year that marks the 35th anniversary of the plan opening date (or that marks the 40th anniversary for a plan with a beneficiary who has a disability).
- There are flexible investment options permitted within the plan; for example, investments that are eligible for a Registered Retirement Savings Plan (RRSP) are also eligible for an RESP.
Please visit the Government of Canada website for further details.
Determining the right plan for your family
The choice between an individual and a family plan will be specific to each family and may depend on a number of factors. If your family includes multiple children who are fairly close in age, the easier choice from an administrative standpoint may be a family plan. If, however, there’s a significant age gap between your children, you may want to consider individual plans or additional family plans because of the time requirements for winding down RESPs (i.e. by December 31 in the year of the 35th anniversary of the plan). For example, if you established a plan 15 years ago, it would have to be wound down in 20 years. If you were to add a newborn child to that plan, the child would only be 20 when the plan would have to be wound down and they may not have completed post-secondary education yet.
For family RESPs, another key benefit is that the plan funds don’t have to be paid equally to each beneficiary. So if one of your children doesn’t end up pursuing post-secondary education or if each child has different educational costs, there’s flexibility in the amounts that can be paid out to each beneficiary.
This same type of flexibility isn’t available with an individual plan, so it may create an issue if the beneficiary doesn’t go to post-secondary school or doesn’t use all of the funds in the plan, because the income earned in the plan has to be paid to the named beneficiary.
Taking advantage of the Canada Education Savings Grant (CESG)
One of the main benefits of RESPs is a federal government program called the Canada Education Savings Grant. If you save in an RESP for a child who’s 15 years old or younger (specific rules exist for children who are 16 and 17 years old), the federal government will automatically contribute to the RESP via a grant.
Each year, the government will match 20 percent of your contribution, up to an annual maximum of $500 (for a $2,500 contribution), for each beneficiary. If the beneficiary has unused grant room from a previous year, the annual maximum payable is $1,000. The lifetime limit for the grant is $7,200 for each child.
Within a family plan, another benefit is that accumulated CESG contributions may be shared and don’t have to be paid equally among beneficiaries. So if one of your children goes to a school that’s much more expensive than the other child’s, for example, there’s no requirement that the CESG payouts have to be equal for each child.
Note: In order to accumulate grant room for any given year, a beneficiary must be a resident of Canada. And, if your child ultimately doesn’t continue their education after high school, this grant money has to be returned to the government.
Please visit the Government of Canada website for further information and details.
RESPs as a wealth transfer option
Helping grandchildren or other young family members may be a financial priority for some grandparents or others in their senior years. If you’re someone who feels strongly about passing down wealth during your lifetime and if higher education is a value within your family, contributing to an RESP may be a meaningful and effective way to transfer wealth as part of your estate planning goals.
In general, there are two ways for you to contribute to an RESP as a grandparent: as the subscriber or by gifting funds to your son or daughter to put in an RESP they’ve established for your grandchildren.
For those who prefer to be the subscriber, there are certain advantages to establishing multiple-beneficiary plans. For example, a grandparent can include all of his or her grandchildren from each child in one family RESP.
If you prefer the gifting approach, a main benefit is that the subscriber (the grandparent’s child) is likely age 71 or younger and can transfer the earnings from the RESP to their own RRSP, with certain limits, if one of the beneficiaries does not pursue post-secondary education (if the subscriber is over 71, this option is not available). Keep in mind, however, that the disadvantage is that you, the grandparent, have no control over the funds; in gifting the funds, your son or daughter will control how they’re used, and as the RESP subscribers, they will be able to withdraw the contributions.
Planning for withdrawals
Once enrolled in a post-secondary program, when your child, children or other younger family members who are RESP beneficiaries start needing the funds, the main priority should be structuring the withdrawals in a tax-efficient way.
The income, gains and government incentives that accumulate within the plan—including the CESG, CLB and some provincial incentive plans—can be grouped together and withdrawn as Education Assistance Payments (EAPs). It’s generally advisable for beneficiaries to receive EAPs first, rather than a refund of contributions. While EAPs are taxable in the hands of the beneficiaries, the taxes are usually minimal—or nil if they’re spread out properly. Another reason to start drawing EAPs early is that if the CESG and income portions remain in the RESP after a beneficiary has completed school, there may be negative consequences when these funds are withdrawn from the plan.
In general, there are four main types of withdrawals:
- Consist of accumulated income, CESG, CLB and provincial benefits
- Are payable for up to six months after the beneficiary ceases enrollment in an educational program
- Include a $5,000 withdrawal limit in the first 13 weeks of a post-secondary program
- Are fully taxable to the beneficiary
- Beneficiary pays very little tax, if any, since they’re entitled to the tuition tax credit in addition to their basic personal exemption
Refund of contributions:
- Contributions (principal) can be returned to you, the subscriber, or to your beneficiary at any time
- A portion of the CESG may be repayable to the government
- Not taxable
If the RESP continues after the beneficiary leaves post-secondary education, or the beneficiary never ends up attending, the remaining income can be withdrawn as follows:
Accumulated income payments (AIPs):
- May be paid out if there’s income earned within the RESP that hasn’t been used by a beneficiary and specific conditions are met
- Are fully taxable to the subscriber
- The amount subject to tax can be reduced if you transfer up to $50,000 to your RRSP, if you have contribution room
- Are subject to an additional 20 percent tax for any portion not transferred to the subscriber’s RRSP or spousal RRSP
Payment to a designated educational institution (DEI) in Canada:
- A payment made if the RESP has to be collapsed while investment income remains in the plan and the plan doesn’t qualify for an AIP
- Not taxable income to you or your beneficiary
- Not eligible for a charitable donation tax credit
“Number of students enrolled in post-secondary institutions in Canada from 2000 to 2017 (in millions),” Statista website, 2019. https://www.statista.com/statistics/447739/enrollment-of-postsecondary-students-in-canada/
Universities Canada website, “Facts and stats,” page, accessed in February 2019. https://www.univcan.ca/universities/facts-and-stats/
- Universities Canada website, “Tuition fees by university” page, accessed in February 2019. https://www.univcan.ca/universities/facts-and-stats/tuition-fees-by-university/
- “Canada Education Savings Grant (CESG) Take-up Rates by Province and Territory,” Government of Canada website, accessed in February 2019. https://open.canada.ca/data/en/dataset/f2113c88-8fed-43bb-9255-968200182e52
- “Census in Brief: Household contribution rates for selected registered savings accounts,” Statistics Canada website, last modified January 3, 2019. https://www12.statcan.gc.ca/census-recensement/2016/as-sa/98-200-x/2016013/98-200-x2016013-eng.cfm