Back to blog

Registered Education Savings Plans (RESPs)

What is it? A Registered Education Savings Plan (RESP) is a special investment account that helps families plan for post-secondary education funding, and provides future tax-saving and tax-deferring opportunities. Also, the RESP allows access to the Canadian Education Savings Grant (CESG), a government freebee that makes an RESP even more attractive!

What’s a Beneficiary? The beneficiary is the student who is expected to make use of the RESP to fund his or her education. The lifetime contribution limit for a beneficiary savings $50,000. Over-contribution results in a penalty tax of 1% per month on the over-contributed amount, until it is withdrawn. From 2007 on, there is no annual limit for RESP contributions.

There is no age limit for being a beneficiary of an RESP; the only drawback is that adult beneficiaries are not eligible for the CESG. Contributions can be made over a 31-year period, and the plan must be wound up by the end of its 35th year.

How does the CESG work? The CESG is a government incentive implemented to encourage people to make use of RESPs: the government will match 20% of your annual contributions, up to a maximum of $500 every year, until the child turns 17 years old. Then things get more complicated – that’s for another discussion. The point is that is free money that instantly provides a return on your investment into the plan that’s frankly impossible to beat! The total CESG that can be paid into a plan by the government is $7,200 over the life of the plan.

In order to receive maximum CESG, it would therefore be better to make minimum annual payments of $2,500 instead of making one big payment to the RESP. Unused CEGC contribution room can be carried forward. For instance, if you do not make a RESP contribution in year 5 but contribute $5,000 in year 6, you will be able to receive $1,000 of CESG in year 6. However, the maximum CESG is $1,000 in any given year.

What are the tax benefits? The investment pool grows free of any tax each year (possibly for many years) and the withdrawals for the capital invested are return to the contributor tax free. The accumulated income and the CESG are distributed to the beneficiary when they attend a qualifying post secondary educational program, and included in their (typically low) income, usually attracting tax at lower rates. Not a bad result!

* = required field