RESP (registered education savings plan)

Who is who in an RESP

The subscriber opens the plan and contributes, the beneficiary is the future student, and the promoter, usually a financial institution, administers it. The beneficiary needs a social insurance number for contributions to be accepted, and family plans can name more than one beneficiary, each of whom must be connected to the subscriber by blood relationship or adoption.

Unlike an RRSP, contributions are not deductible and interest on money borrowed to contribute cannot be claimed. The benefit is tax-free growth while the money stays in the plan and the grants described below.

Limits and grants

There is no annual contribution limit, but a lifetime limit of $50,000 applies per beneficiary across all RESPs. Excess contributions are taxed at 1% per month until withdrawn, which matters when grandparents and parents each open a plan for the same child.

The Canada Education Savings Grant adds 20% of annual contributions to a maximum of $500 a year per beneficiary, or up to $1,000 if there is unused grant room from earlier years, with a lifetime limit of $7,200. Lower-income families can qualify for an additional amount on the first $500 contributed. The Canada Learning Bond is a separate amount of up to $2,000 for eligible low-income families, with no contributions needed. The CRA’s list of provincial incentive programs does not include an Ontario one, so Ontario families generally rely on the federal programs.

An illustrative example

Suppose you contribute $2,500 a year for a child for five years. The basic grant is 20% of $2,500, or $500 each year, so after five years you have contributed $12,500 and received $2,500 in grants, before any investment growth. Contributing $1,000 a year would earn only $200 a year in grants, which is why contribution timing and any carry-forward room are worth asking about. The numbers are illustrative.

Taking money out

Your contributions can be returned tax-free. The grants and the growth are paid as educational assistance payments, which the student reports as income, usually on a T4A slip, while enrolled in a qualifying post-secondary program. Whether any tax is payable depends on the student’s other income and credits.

If the child does not study after high school, the grants must be returned. Income paid to you instead, called an accumulated income payment, is taxed at your rate plus an additional 20%, though part can be reduced by contributing to your RRSP if the conditions are met. Contributions can generally be made until the end of the year of the plan’s 31st anniversary, and payments from the plan generally need to be completed in the year of its 35th, with different limits for specified plans.

What to discuss with your accountant

Ask how much to contribute each year to capture the grant, how your plan and a relative’s plan add up against the $50,000 limit, and who should be named as subscriber. Keep the plan contract, annual statements and grant statements.