Post-Secondary School Is Pricey, a RESP Can Help!
First off, let’s start with what the heck is a RESP (Registered Education Savings Plan). It is an investment vehicle, like a RRSP or a TFSA, that has its own set of tax rules. The goal of the RESP is to allow you to help with (or if your kids are lucky, fully fund) post-secondary education for your kid(s).
One of the best benefits of the RESP is that the Canadian government helps to beef up the money that you are contributing. There are a few ways this happens, but for simplicity, I am going to stick with the main grant today.
That grant is the Canada Education Savings Grant (CESG). This grant is paid out based on the amount you contribute to the RESP (yes there’s a lot of acronyms but that’s how the CRA rolls). The grant money you are entitled to is deposited directly into the RESP.
How do you qualify for the CESG? No matter what your family income, you are entitled to the basic CESG. This grant is 20% of your annual contributions up to a maximum of $500 per child per year, with a lifetime limit of $7,200 per child. For lower income households, there are some additional grants that you may be entitled to. For simplicity, I’m not going to add those details here because we all know how things change.
Unused contribution room is carried forward and used when RESP contributions are made next. Translation, if you have not contributed to your child’s RESP and therefore not received any government grant money, you are entitled to grant money over the $500/year. So, if you have a 10 year old, you have $5,000 of grant money available to you, but remember you would need to contribute $25,000 to get that as the grant is 20% of what you contribute.
If your child is 16 or 17 there are some additional things that you need to know. These rules are to try and encourage parents/guardians to start investing for their children’s education early. To get the CESG if your child falls into this age bracket, at least one of the following has to be true:
- At least $2,000 was contributed (and not taken out) from your child’s RESP before the end of the calendar year that they turned 15.
- You contributed at least $100 (and didn’t take it out) for at least 4 years before the end of the calendar year that they turned 15.
The earlier you start, the better, even if you can only contribute a little bit each year. You can start investing in a RESP as soon as your child has a SIN. I started with $25 every payday when my daughter was very young and increased it as we were able to. We are fortunate (or I guess really, she is), that we have been able to cover her expenses for her first year, and her tuition for subsequent years. She is now headed into year 5 of 6 now so she is one lucky lady, if I do say so myself!
My kid is ready to start using their RESP, now what?
First off, they have to be attending a qualifying educational program. This includes programs full or part-time post-secondary or other designated educational institutions in Canada, including distance learning. Education abroad is also an option, but it has additional requirements so check with your investment professional. To withdraw funds, you will need to provide proof of the program that your child will be attending. I have taken in her tuition bill in each year and that has worked for us.
What about the taxes?
There are two different portions of your child’s RESP and from a tax perspective they are very different. First, the money you contributed, when it is withdrawn from the RESP, there is no tax implication. When you deposit the money, there is no tax benefit to you either. The money that the government contributed to the RESP is taxable, but to your child. The good news here is that for most post-secondary students, this does not create a tax bill at income tax time. As they are typically not earning a lot and they have the deduction of tuition to help them. Even if they do end up owing taxes, they are usually in a low tax bracket (but if they aren’t they can afford their tax bill). When you are making a withdrawal from your child’s RESP, consider how much of each portion you want to take out. If you expect it to be a higher income year for your child, minimizing the grant amount that you are taking out could be a good idea. Checking with your tax professional to get some guidance would be a great idea.
Okay last question, what if my child doesn’t go to school after high school or takes time off before starting post-secondary education? Don’t worry you have some options, and you won’t lose the money you contributed.
- RESP accounts can be used towards education for up to 35 years after the year the account was created.
- In a family RESP you can shift the funds to another beneficiary (if each child has received the maximum grant, the grant money would have to be repaid to the government).
- The amount you contributed can be taken out at any time tax-free.
- All government grant money in the plan will be returned to the government if the funds are not used for post-secondary education.
- You can choose to roll over investment income (up to $50,000) that was made within the RESP to your RRSP (if you have contribution room). This would then be taxed when the funds are withdrawn from your RRSP.
If all of this has you shaking your head (and don’t worry if it does, you are NOT alone), you need a professional that you trust that can walk you through the process. If you don’t have someone you trust and you are looking for some guidance, please shoot me an email (sherry@moneymindsetfc.com) and let me know what province or territory you live in and I will do my best to send you a few options.
As all things like this, do tend to change I have included a link to all things RESP so you can go check it out if you are reading this after 2020!
https://www.canada.ca/en/services/benefits/education/education-savings/resp.html
Sherry
