RESPs and other ways to save for education

Parents (and grandparents) want the best for their children and grandchildren, including a good education.

In today’s competitive job market, a college or university degree is more important than ever and will likely become even more necessary in the future. That’s why it’s essential to start planning for the costs of education right now.

Registered Education Savings Plans

Registered Education Savings Plans (RESPs) are one of the best ways to meet your family’s education savings goals.

With RESPs, you can contribute to the future cost of a child’s education. Unlike RRSPs, contributions made to an RESP are not tax-deductible. However, the contributions have the opportunity to grow tax-sheltered in the account. And the income earned on the contributions is not taxable until paid out to a beneficiary (who will be typically taxed at a very low rate, if at all).

Withdrawals of income can be made to a beneficiary in full-time attendance at a qualified post-secondary institution. There is no limit on capital withdrawal. It can be made to either subscribers or beneficiaries.

While there are currently no annual contribution limits, you can only receive the Canada Education Savings Grant (CESG) on the first $2,500 in contributions per year, or up to the first $5,000 in contributions, if sufficient carry forward room exists. The maximum CESG paid per year is $1,000. Any contributions over and above these amounts will not receive any CESG for the current year or subsequent years. The lifetime RESP contribution limit is $50,000 for each child. You can make contributions to an RESP for up to 31 years, and the plan must be terminated no later than 35 years after you first opened it.

What happens if, for any reason, your chosen beneficiary doesn’t pursue post-secondary education? In that case, you can either name another beneficiary to the plan or transfer any unused income to your own (or your spouse’s) RRSP, up to a $50,000 limit, provided you have the contribution room. You can also have the income refunded with an additional 20% tax applied on top of the marginal tax rate. If you choose to be refunded, you’ll only be taxed on the gains because your contributions were made with after-tax dollars, and, therefore, they’re not subject to additional taxes upon withdrawal.

Finally, if you wish to contribute for the current year, ensure you have your child’s Social Insurance Number and plan to contribute before the end of December.

RESPs and the Canada Education Savings Grant

The 1998 federal budget introduced the Canada Education Savings Grant (CESG) to make RESPs a more attractive savings vehicle for Canadians. Updates to the plan were added in 2007 and 2008.

Under the RESP program, every RESP beneficiary, until the end of the year they turn 17, is eligible to receive a grant of up to 20% of the first $2,000 contributed each year ($400 maximum per year) from 1998 to 2006 inclusive, then $2,500 contributed from 2007 onward. Contributions for beneficiaries aged 16 and 17 will only receive a CESG subject to certain stipulations.

While missed RESP contributions cannot be carried forward, the CESG room can be accumulated until the end of the year the beneficiary turns 17. There is a lifetime limit of $7,200 on the amount of CESG money any one student can receive from an RESP. Payments are to be made directly into the RESP and can be invested along with the contributions.

The CESG can be included in the educational assistance payments paid to the beneficiary once they pursue higher education. However, any unused CESG must be repaid to the government.

Canada Learning Bond

In addition to the CESG, your child may qualify for the Canada Learning Bond (CLB). CLB is money that the government adds to an RESP for children from low-income families meeting net income and a qualified number of children thresholds. The Government of Canada contributes up to $2,000 maximum CLB to an RESP for an eligible child. This includes $500 for the first year of eligibility and $100 each subsequent year the child continues to be eligible, up to and including the year they turn 15. Like CESG, if your child does not pursue higher education, any unused CLB must be repaid to the government.

Tax Free Savings Account

Another option to assist with education costs is to use a Tax Free Savings Account (TFSA).

A TFSA is versatile in its use and may effectively complement an RESP. RESPs and TFSAs are similar as contributions to either type of account are not tax-deductible. However, TFSAs have some unique features when compared to an RESP. For instance, income earned within a TFSA is never subject to tax, even when withdrawn. In addition, funds within the TFSA can be used for any purpose – not just education. With an RESP, the CESG and other potential grants must be repaid to the government if your child does not pursue higher education. Unused contribution room within a TFSA may be carried forward. As of January 2022, the cumulative TFSA contribution limit is $81,500, with a current annual limit of $6,000.

Given the rising costs of post-secondary education schooling, saving for a child’s education needs to be a priority for parents. Contact the Dri Financial Group to discuss educational savings strategies in more detail.