A guide to registered education savings plans

From the moment a child is born, looking towards the future takes on a whole new level of meaning for families. The notions of providing, preparing, and saving run deep for many parents, grandparents, and other family members as a means to help the younger generation put their best foot forward when they transition into post-secondary education. With the ever-rising costs of tuition and education-related expenses, Registered Education Savings Plans (RESPs) stand out as a primary option to effectively save for your child’s future degree.

Education costs and where RESPs come into play

Since 1990–1991, the average tuition (plus other compulsory fees) in Canada will have grown from $1,464 to an estimated $7,755 in 2017–2018, including a 13-percent jump from 2014–2015.^{1, 2} If the average annual increases continue in this pattern, children born in 2015 may be looking at over $60,000 in tuition and compulsory fees alone for a four-year undergrad degree.² And these numbers are only part of the overall equation once accommodations and other living expenses are factored in, driving home the significance of establishing an efficient savings plan.

At the highest level, RESPs are tax-deferred plans specifically designed to help families reach education savings goals, offering a combination of flexibility, investment growth potential, and government support.

Canada Education Savings Grant (CESG)

A main benefit of RESPs exists in the form of a federal government support program called the Canada Education Savings Grant. These grants provide a significant boost to the RESP’s capital, helping to build savings faster.

Features of the CESG

• A lifetime limit of $7,200 per beneficiary.
• The CESG is paid to an RESP beneficiary who is 15 years old or under. (Specific rules exist for children who are 16 and 17 years old.)
• The government matches 20 percent of annual contributions to an annual maximum of $500 on 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.
• A beneficiary must be a resident of Canada in order to accumulate grant room for any given year.

Further information and details are available on the CRA website.

Building strategy into withdrawals

When the time comes for a beneficiary to start withdrawing funds once enrolled in a post-secondary program, a basic understanding of the types of withdrawals can make a difference in regards to how the funds are treated. In general, it’s advisable for a beneficiary to receive an Educational Assistance Payment (EAP) first, rather than a refund of contributions. While contributions can be removed at any time, if the CESG and income portions remain in an RESP after a beneficiary has completed school, there may be negative consequences when these funds are withdrawn from the plan.

RESPs from a grandparent’s perspective

Saving for a young family member’s educational future is a focus not limited just to parents, but is a feeling that resonates quite strongly among the grandparent generation as well. Within some families, grandparents may have both the desire and the financial means to contribute to an RESP for their grandchildren. Not only is this a wonderful way to give a meaningful gift, but RESPs also present an opportunity for grandparents to transfer wealth early as part of their estate-planning goals.

Under the RESP guidelines, grandparents are able to establish and be the subscriber of an RESP. For those who choose to do so, there are certain advantages in establishing multiple beneficiary plans. For example, a grandparent can include all of his or her grandchildren from each child in one family RESP. A parent, by comparison, won’t have the same list of beneficiaries since they cannot include nephews and nieces as beneficiaries of a family plan.

An alternate approach is one in which grandparents gift funds to their son or daughter who in turn establish (i.e., are the subscriber of) the RESP for the grandchildren. A main benefit of this approach is that the subscriber (the grandparent’s child) 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. The disadvantage is that the grandparent has no control over the funds; the son or daughter controls how gifted funds are used, and as the RESP subscribers, they have the ability to withdraw the contributions.

With approximately 1.7 million students enrolled in Canadian universities in 2014–2015, according to Universities Canada, and given the fact that roughly three out of every four new jobs will require a post-secondary education,³ the value of higher education — and adequately saving for it — is paramount. Having the support of an RESP allows youth to focus on their education, rather than the cost of it, and likewise puts them in the best position to successfully transition into life after school.