A Registered Education Savings Plan (RESP) is an investment vehicle designed to save for your children’s post-secondary education. The Canadian government will contribute a Canada Education Savings Grant (CESG) to the plan that is based on a percentage of the amount contributed by the subscriber. Funds within an RESP accumulate on a tax- deferred basis.
You (the subscriber) may contribute up to $4,000 per year, per beneficiary (child) to a lifetime maximum of $42,000 per beneficiary.
The government provides a grant (Canada Education Savings Grant – CESG) of 20% on the first $2,000 contributed each year for each beneficiary up to the end of the year in which the beneficiary turns 17 (special conditions apply for beneficiaries aged 16 and 17), subject to a maximum cumulative grant of $7,200 per beneficiary.
Income grows in the RESP tax-free until the beneficiary is ready to go full-time to an eligible post-secondary educational institution. When the student begins to use the RESP for education, the income accumulated in the plan, and the grant itself (collectively “Education Assistance Payments – EAPs”) become taxable. However, because the student typically has little other income, he or she effectively pays little or no tax on RESP income.
Types of Plans
These plans can only have one beneficiary. There are no restrictions on who can be a beneficiary under these plans. The beneficiary does not have to be related to the subscriber, and can be over 21 when named. Contributions to this plan can be made up to 22 years after the plan is established.
These plans can have one or more beneficiaries. However, each beneficiary must be connected by blood or adoption to each living subscriber under the plan or have been connected to a deceased original subscriber, and be under 21 when named. Contributions to this plan can only be made until a beneficiary turns 21.
Benefits of the Family RESP
Family plans are ordinarily established for several siblings under the age of 21, and are subject to the usual contribution limits per beneficiary. These plans give the subscriber more flexibility when it comes time to make EAPs because they do not need to be limited by the proportion of each beneficiary’s “share” of the contributions. This allows a contributor who has named his or her three children as beneficiaries, for example, to direct the entire income to two children only if the third child does not pursue post-secondary education.