One of the most common reasons newcomers from various parts of the world choose to move to Canada is to ensure a better future for their children. As a result, for newcomers moving to Canada with families, saving for your kids’ education is often a top financial priority. The cost of post-secondary education in Canada can be quite high, even for domestic students, and the sooner you start saving for this goal, the more options and flexibility your children will have while planning their future. In this article, we dive into Registered Education Savings Plans (RESPs), an investment option for post-secondary education.
In this article:
What is an RESP?
An RESP is a tax-deferred savings plan that allows subscribers (usually parents) to efficiently save for a beneficiary’s (usually a child’s) post-secondary education. The biggest advantage of an RESP is that the government matches a part of your contributions in the form of grants. You can open an RESP without having a bank account.
RESPs are tax-free as long as the money stays in the savings plan which means the investment income you earn with the plan grows on a tax-deferred basis until it is withdrawn. Upon withdrawal for education purposes, the returns earned and the government grant components are taxed.
However, if the money is withdrawn by an eligible child to pay for their post-secondary education (tuition and living expenses), they may not have other income sources, aside from the educational assistance payments (EAPs) from the RESP. As a result, they’ll likely be subject to relatively low tax rates.
Key stakeholders in an RESP
- Subscriber: A person who makes contributions to the RESP. If you invest in an RESP, you (or someone acting on your behalf) would be called a subscriber or a contributor. You don’t have to be the child’s parent to open and contribute to an RESP on their behalf. You can also open an RESP for someone else’s child or another adult.
- Beneficiary: A person (future student) who receives contributions or income from the RESP. While you can open an RESP for a child, you can also name yourself or another adult as the beneficiary.
- Promoter/provider: The entity or institution (e.g. bank, mutual fund company, scholarship foundation, or trust company) that pays the contributions and the income earned on those contributions to the beneficiaries.
Types of Registered Education Savings Plans
There are three types of RESP accounts, and you should choose the one that’s right for your situation. Here’s what you need to know about the different RESP options available:
Family RESP plan
This plan may be best suited if you have (or plan to have) more than one child or if you want to save for the education of one or more children related to you by blood or through adoption. You can open a family RESP plan for your children, stepchildren, grandchildren, brothers or sisters, but not for nieces, nephews, cousins, aunts, or uncles.
The benefit of a family plan is that the savings can be shared among the beneficiaries, and the government grants and bonds can be used by any eligible beneficiaries in the plan.
Individual RESP or non-family plan
An individual or non-family RESP is an option if you have only one child or if you’re saving for the education of a child you aren’t related to. Adults can also open an individual plan RESP for themselves.
Group RESP plan
A group RESP plan allows you to combine your savings with that of others who’re also saving for the education of their children born in the same year. You can use a group plan if you have one child or are saving for a child who isn’t related to you.
With a group plan, you must make regular payments throughout the term of the RESP, and how much each child gets depends on the total funds in the group account and the number of students enrolled in post-secondary studies in a given year. Group RESPs are offered by dealers and typically, your funds will be invested in low-risk investments.
How to open an RESP
Before you can open an RESP account, both you and the beneficiary must have a Social Insurance Number (SIN).
Next, you’ll need to choose the right promoter and compare the plans and benefits they offer. For instance, some promoters may allow you to register for grants offered by the federal government but not for incentives offered to residents in the provinces of Quebec and British Columbia.
When you’ve decided which RESP plan you want, you can open an RESP with your promoter, name one or more beneficiaries, and start making contributions. To learn more about the types of RESP plans offered by RBC and open an account, you can book an appointment with an RBC Newcomer Advisor.
Government benefits for your RESP
One advantage of having an RESP is that the Canadian government matches a portion of your contributions. The government contributes to your RESP through two programs: the Canada education savings grant (CESG) and the Canada Learning Bond (CLB). In addition to federal government benefits, British Columbia and Quebec offer provincial benefits that can add to your RESP.
Canada Education Savings Grant (CESG)
The CESG is an incentive paid by Employment and Social Development Canada (ESDC) to encourage subscribers (parents, friends, or family members) to save for a child’s post-secondary education. Based on the amount you’ve contributed to a child’s RESP in a given year, the Canada Education Savings Grant is deposited directly into the RESP. There are two types of CESG:
- Basic CESG: You may be eligible to receive basic CESG regardless of what your family income is. Basic CESG is calculated as 20 per cent of annual contributions made to all eligible RESPs for a given beneficiary, up to a maximum of $500 per year, and a lifetime maximum of $7,200.
- Additional CESG: If your adjusted family income is below a certain threshold, ESDC will pay an additional CESG over and above the basic amount for each qualifying beneficiary. For 2022-2023, families with an income of less than $50,197 may be eligible for an extra 20 per cent matching of their contributions, up to a lifetime maximum of $7,200. No additional CESG is paid to families with a total income of $100,392 and above.
Canada Learning Bond (CLB)
The CLB is paid to families with low income (with an annual income of $50,197 or less) who’re saving for their children’s post-secondary education. Unlike the CESG, a beneficiary may be eligible for CLB even if no contribution is made to their RESP in a given year.
Eligible beneficiaries can receive $500 in the first year and an additional $100 for each year until they turn 15 years of age, up to a lifetime maximum of $2,000.
British Columbia Training and Education Savings Grant (BCTESG)
The BCTESG is available to eligible residents of British Columbia who have an RESP for a child born in 2006 or later. The B.C. government contributes $1,200 to the RESPs of eligible children under this grant. No matching contributions are required from the subscriber.
Quebec Education Savings Incentive (QESI)
QESI is a refundable tax credit that is paid directly into the RESP of a child. The lifetime maximum eligible beneficiaries can receive from the QESI is $3,600.
Contribution limits for Registered Education Savings Plan
The Canada Revenue Agency (CRA) registers the RESP and lifetime limits are set by the Income Tax Act on the amount that can be contributed for each beneficiary.
Currently, there is no annual limit for contributions to RESPs, however, there is a lifetime limit of $50,000 that can be contributed to all RESPs for a beneficiary in total. There is no limit on the number of RESP plans a subscriber can have from different providers.
It is your responsibility to keep track of your contributions and ensure that you don’t exceed the lifetime limit of $50,000. An overcontribution tax of one per cent per month will be charged on your share of the overcontribution until the excess amount is withdrawn.
That said, the sooner you start to save, the sooner you will be earning interest, and the more your money will grow. Even minimal savings of $5 a week can quickly add up, especially with government contributions.
Eligibility criteria for an RESP
Both the subscriber and the beneficiary must meet certain basic eligibility requirements in order to open or benefit from a Registered Education Savings Plan.
Eligibility criteria for RESP subscribers
Generally, there are no restrictions on who can be the original subscriber under an RESP (with the exception of family plans). Anyone with a valid Canadian SIN can open an RESP account for a child – parents, guardians, grandparents, other relatives or friends. All subscribers under an RESP have to give their Social Insurance Number to the promoter before CRA can register the RESP.
Eligibility criteria for RESP beneficiaries
A student (beneficiary) can only receive educational assistance payments (EAPs) if they are enrolled in a qualifying educational program. This includes students who:
- Are attending a post-secondary educational institution; or
- Are enrolled in distance education courses, such as correspondence courses, provided by such institutions; or
- Have attained the age of 16 years and are enrolled in a specified educational program.
Investment products that can be held in an RESP
Like with other registered accounts, a Registered Education Savings Plan can hold a range of investment products, such as stocks, ETFs, options, bonds, Guaranteed Investment Certificates (GICs) and mutual funds.
Ideally, you should take your risk appetite into account while planning your investment strategy. If you’re unsure about what products might be best for you, you can always speak to a financial advisor for tips.
Post-secondary education programs covered by RESPs
Qualifying educational program
A program at post-secondary school level, that lasts at least three consecutive weeks and requires a student to spend at least 10 hours per week on courses or work.
Specified educational program
A program at post-secondary school level that lasts at least three consecutive weeks and requires a student to spend no less than 12 hours per month on courses.
Post-secondary educational institution
- A university, college, or other designated educational institution, or
- An educational institution certified by Employment and Social Development Canada as offering non-credit courses that develop or improve skills in an occupation.
- A university that has courses at the post-secondary school level at which the beneficiary is enrolled on a full-time basis in a course of not less than three consecutive weeks, or
- A university, college or other educational institution that has courses at post-secondary school level at which a beneficiary was enrolled in a course of not less than 13 consecutive weeks.
RESP withdrawal rules
As a newcomer, you may have questions about what happens if your child (or other beneficiary) decides not to enroll in a post-secondary program or if the cost of their program is much less than the funds available in their RESP. What happens to the excess RESP funds in such cases? The withdrawal rules vary depending on who is withdrawing funds and for what purpose. Here’s an overview of the RESP withdrawal rules for some different scenarios:
Beneficiary pursues post-secondary education
When the beneficiary is ready to start their post-secondary study program, they can withdraw funds from the RESP in the form of educational assistance payments (EAPs) to cover their tuition, education and living expenses.
To receive CESG or CLB as part of EAP, the beneficiary must be a resident of Canada and have sufficient contributions made to their RESP over the years.
Child doesn’t attend post-secondary institution or doesn’t use the RESP fund entirely
In such a scenario, it is possible to add another child/beneficiary to an RESP plan to support their education. Certain rules apply, so be sure to check with your financial advisor.
Subscriber wants to withdraw RESP funds for non-educational purposes
As a subscriber, if you withdraw money from your RESP for non-education purposes, the grant component is returned to the government. The remaining money will be taxed at your regular income tax rate, plus an additional 20 per cent. Up to $50,000 can be transferred to your Registered Retirement Savings Plan (RRSP) or your spouse’s RRSP to offset tax liability, as long as you have room for RRSP contributions.
Closing your RESP account
If you decide to close your RESP, any savings that remain in your RESP when it closes will be handled as follows:
- Money received from the CESG or CLB will be returned to the government;
- Any personal savings in the account will be returned to the person who opened the plan.
- Interests earned will be returned to you if all of the following apply:
- All children named in the plan are at least 21 years old and are not eligible for EAP;
- The subscriber is a Canadian resident; and
- The RESP was opened at least 10 years ago.
Any funds you receive upon closure of your RESP will be taxed at your marginal tax rate plus an extra 20 per cent.
What happens to the RESP if my child decides to study outside of Canada?
RESPs can be used to cover education outside Canada, so your child will have the flexibility to decide where and what they want to study.
However, not all foreign education expenses may be covered by EAPs. Typically, an RESP can cover the cost of post-secondary programs offered by foreign universities, provided the program is for at least three consecutive weeks and delivered full-time. An RESP can also be used for longer (13 weeks or more) post-secondary courses offered by a foreign university, college, or other educational institution. If the beneficiary is enrolled in an eligible study program abroad, they can also use their Educational Assistance Payments to cover their living expenses.
What student expenses can be covered by an RESP?
RESP funds can be used to pay for tuition or cost of living expenses. They are dispensed in the form of EAPs as follows:
- For studies in a qualifying educational program: $5,000, for the first 13 consecutive weeks. Beyond the first 13 weeks, there is no limit on the amount of EAPs that can be paid if the student continues to qualify to receive them. If there is a 12-month period in which the student is not enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum applies again; or
- For studies in a specified educational program: $2,500, for the 13-week period whether or not the student is enrolled in such a program throughout that 13-week period.
A student can continue to receive EAPs for up to six months after ceasing enrolment, provided that the payments would have qualified as EAPs if they had been made immediately before the student’s enrolment ceased.
How long can an RESP stay open?
If the beneficiary of an RESP decides not to enrol in a post-secondary institution right after high school, the RESP can remain open in case they change their mind. As a subscriber, you can contribute to an RESP for up to 31 years since it was first opened. Most RESPs expire after 35 years, and you’ll need to use or withdraw your funds by that time.
A Registered Education Savings Plan is an excellent way to set aside money for your children’s education and allow it to grow tax-free until your kids are ready to go to university or college. If you contribute at least $2,500 a year, the government will contribute an extra $500 (up to a lifetime maximum of $7,200) to your child’s RESP under the Canada Education Savings Grant, making it easier for them to achieve their academic goals after high school.