What is a Registered Education Savings Plan?

A Registered Education Savings Plan (RESP) is a special savings account that can help you, your family or friends start saving now for your child’s education after high school. The Government of Canada registers RESPs so savings for education can grow tax-free until the person named in the RESP enrolls in studies after high school.

What are the benefits of opening an RESP?

When you open an RESP account for your child, the Federal Government will help you save by adding money to your RESP through special savings incentives. These incentives are called the Canada Education Savings Grant and the Canada Learning Bond. They are only available if you open an RESP. As for eligibility, anyone, including parents, guardians, grandparents, other relatives or friends, can open an RESP account for your child.

You can open an RESP account through a financial institution such as a bank or credit union or through a certified financial planner or group plan dealer. Institutions and organizations that offer RESP accounts are known as “RESP providers.”

The amount of money you put into an RESP depends on the type of RESP you choose. Some RESPs have no minimum deposit requirements. Before you choose an RESP, shop around among different RESP providers to find the plan that best meets your needs.

For each child named, you can put up to $50,000 into an RESP. There is no annual contribution limit. Note that the Government will add a grant equal to 20% of the annual contributions made to a maximum of $500 (i.e. the grant is only given on the first $2,500 of annual contributions).

Every RESP is different. Some types of RESPs require specific monthly contributions. Others let you put money into your RESP whenever you want. The sooner you start to save, the more your money will grow. Even savings of $5.00 a week can add up quickly, especially when government grants and earned interest are added to your savings.

You can even open an RESP for yourself. There is no age limit for opening an RESP. You can open a plan for a child, or you can name yourself or another adult as the beneficiary of your plan. An RESP allows adults to earn interest on their education savings tax-free.

RESP vs. RRSP — What's the difference?

When it comes to saving for the future, it is easy to get confused. Banks, trust companies, financial institutions, insurance companies all claim to offer the best plan for your dollar — how do you choose?

Let's first clarify one issue: an RESP and RRSP are quite different investment vehicles.

A Registered Education Savings Plan (RESP) is, as the name implies, a savings plan to fund your children's education, specifically post-secondary schools such as colleges, universities, trade schools, and so on.

Although RESPs have been around since the 1960's, the government introduced the Canada Education Saving Grant (CESG) in 1998, making RESPs much more popular.

A Registered Retirement Saving Plan (RRSP) is a saving plan to fund your retirement above and beyond any other pension for which you might qualify. Getting the best return on your money is obviously a big consideration, and if you are not interested in managing you own investments a financial advisor will do it for you.

What are the tax advantages of RESPs and RRSPs?

The money contributed to a retirement saving plan is tax-deductible, and taxes on that money and the interest it accumulates will not be taxed until you withdraw it after you retire. Your income will most likely be lower at that point, you will be in a lower tax bracket, and will pay less taxes on that amount.

An education savings plan on the other hand is funded with after-tax dollars, so the money that is contributed to the plan is not tax deductible, unlike an RRSP.

The interest and grant it accumulates within it, however, does grow tax-free. The contributor does not pay taxes on the growth of the fund. At maturity, when the child turns 18, the principal that was saved in the RESP account will be returned to the contributor (parent, grandparent, aunt, uncle), and because they contributed with after tax dollars, they do not pay taxes on this.

The interest, grant and interest on the grant will get paid out to the child/student, but because they very likely will be in a low tax bracket, very little taxes, if any, will be payable on this amount.

There are tax implications, however, if the child does not pursue post-secondary education: besides transferring the money to a sibling (this would be the best option), the money may be withdrawn and transferred to an RRSP if there is contribution room available. Otherwise, the money can be withdrawn as an Accumulated Income Payment (AIP), and incur a 20% tax penalty.

Any questions concerning the above should be directed to John Dow, Tax Partner — jdow@sbpartners.ca or (905) 632-5978.

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