RESP (Registered Education Savings Plan)

A Registered Education Savings Plan, or RESP, is an investment vehicle used by parents to save for their children’s post-secondary education in Canada. The principal advantages of RESPs are the access to the Canada Education Savings Grant (CESG) and a source of tax deferred income.

Tax Benefits

An RESP is a tax shelter, designed to benefit post-secondary students. With an RESP, contributions (comprising the investment’s principal) are, or have already been, taxed at the contributor’s tax rate, while the investment growth (and CESG) is taxed on withdrawal at the recipient’s tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax, owing to tuition and education tax credits. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student will have a good source of income to fund his or her post-secondary education.

Government Grants

Canada Education Savings Grant

The Canada Education Savings Grant (CESG) is provided to complement RESP contributions, wherein the government of Canada 20% of the first $2,500 in annual contributions made to an RESP. After changes introduced in the 2007 Canadian federal budget, the government may contribute up to $500 per year to a participating RESP. This income is available upon withdrawal from the RESP by a post-secondary recipient, with a maximum lifetime contribution of $50,000. Any contributions over this amount are subject to taxation.

The government grants introduced in 2005, entitled Additional CESG, allowed an additional 10% or 20% for a total of an extra 30 or 40 cents on each dollar of the first $500 contributed to an RESP, depending on the family income of the beneficiary’s primary caregiver. An application is made through the promoter of the RESP, which is often a bank, mutual fund company or group RESP provider.

Canada Learning Bond

The government of Canada also provides a Canada Learning Bond (CLB) to encourage low-income families to contribute to an RESP. Families with children born on or after January 1, 2004, and who receive the National Child Benefit, will receive an additional $500 CLB when they open an RESP and $100 for each year they remain eligible.

Alberta Centennial Education Savings Grant

The Alberta Centennial Education Savings (ACES) grant was introduced in 2005 by the Alberta government to encourage families to begin planning and saving for their children’s post-secondary education.

The government of Alberta contributes $500 to an RESP for babies born to or adopted by Alberta residents on or after January 1, 2005. The Alberta government then contributes a $100 Alberta Centennial Education Savings Grant to students who are enrolled in school in Alberta, and have turned the age of 8, 11, or 14 in 2005 or later.

The provincial government announced, in March 2013, that the programme will be phased out, but did not provide a final date.

Saskatchewan Advantage Grant for Education Savings

The government of Saskatchewan has announced the SAGES to benefit children in the province. The legislation will be implemented in 2013.

Québec Education Savings Incentive

The Québec education savings incentive (QESI) was launched in February 2007 and is a tax measure that encourages Québec families to start saving early for the education of their children and grandchildren.

Each year, Revenu Québec can contribute an amount equal to 10% of the net contributions paid into an RESP over the course of a year, up to a maximum of $250.

Early Withdrawals

Any principal contributed to the RESP can be withdrawn at any time by its contributor. In this case, any eligible CESG payments on those contributions must be repaid to the Government. If the beneficiary has also received additional CESG, none of the beneficiaries in the plan will be eligible for additional CESG for the next 2 years. If the student elects to not attend a post-secondary institution, any accumulated interest may be withdrawn by the contributor; this is called an AIP (Accumulated Income payment). To receive this AIP, the plan must be in place for at least 10 years and all beneficiaries must be over 21 years old. This AIP is taxed as income unless it is rolled into a registered retirement savings plan (RRSP), subject to individual contribution limits and applicable rules.

Group Plans

In group RESPs (otherwise known as Group Scholarship RESPs), individual contributions are pooled with those of other contributors. In a pooled group plan, the interest that is left behind from cancelled RESPs gets paid out with the matured plans. This excess “interest” is also called attrition.