Understanding RESPs

The Registered Education Savings Plan (RESP) helps you save for a child's post-secondary education – and for good reason. In 2018-2019, full-time students in Canada paid an average of $6,838 in tuition for undergraduate programs, up 3.3% from the previous academic year, according to Statistics Canada.¹

While your RESP contributions are put to work in qualified investments, your investment income and capital gains generally grow tax-free within the plan until withdrawn to pay for a child’s educational expenses. You may also be eligible for federal government education grants that can make a real difference in your savings over time. When the student withdraws the funds, they are taxable to them, at their (typically) lower tax rate.

RESPs are set up for a beneficiary, like a child or grandchild, by a subscriber who contributes money to the plan, like a parent or grandparent. Joint subscribers are allowed as long as they are spouses or common-law partners. Beneficiaries must be Canadian residents and have social insurance numbers.

Types of RESPs

There are two types of RESPs, each with specific uses and advantages:

Family RESP

• Subscribers can name one or more sibling beneficiaries in the same plan
• Children, grandchildren, adopted children and stepchildren are fully eligible
• Allows flexibility – you don’t have to split the money evenly between beneficiaries
• If one child doesn’t attend post-secondary school, under certain circumstances, the grant money can be transferred to other beneficiaries

Individual RESP

• One beneficiary
• Can be opened by anyone to save for a child’s education
• Sometimes used in families where there are large age gaps between children

You can choose to be a sole or joint subscriber for either an individual or family RESP. Joint subscribers who open a joint RESP must be spouses or common-law partners of each other.

What Investment Choices are Available for RESPs?

Like most investment accounts, you have access to a broad selection of investment choices and qualified investments, including stocks, options, exchange-traded funds (ETFs), mutual funds, bonds and guaranteed investment certificates (GICs) for your RESP.

RESP accounts are single currency accounts at RBC Direct Investing. While all trades will settle in Canadian dollars, you will still see the U.S. dollar value of your investments. Any foreign income received (dividends or interest) will automatically convert to Canadian dollars.

If you choose to include investments in your RESP that pay foreign dividends, many governments — including the U.S. — apply a non-resident withholding tax to dividends and interest. Withholding taxes are unrecoverable, and may reduce your potential returns. The IRS imposes a 30% withholding tax to dividends paid on U.S. stocks – which can be reduced to 15% by submitting a W-8BEN or W-9 form. Check with your tax advisor to learn more.

Key Benefits of RESPs

Government grants can help your RESP grow faster

The biggest advantage of contributing to an RESP is the Canada Education Savings Grant (CESG). Here’s how it works:

• The federal government will automatically contribute 20% of what you put in, up to $500 per year – to a lifetime maximum of $7,200 for each child.
• Unused CESG grant amounts are carried forward for future years. Each beneficiary has their own pool, even if contributions are combined in a family RESP.
• To receive the CESG at 16 and 17, contributions to all RESPs for the child must total at least $2,000 before the end of the year they turned 15, or at least $100 a year in at least four of the years before the end of the year they turn 15, and cannot have been withdrawn.

RESP contributions may qualify for other grants provided by the Government of Canada and some provincial governments. Click here for an overview of these grants and the forms to apply for them for RBC Direct Investing RESP accounts.

Tax-deferred Growth

• Investments in an RESP generally grow tax-free.
• Tax on the income earned on investments within the plan is deferred until the beneficiary withdraws the funds (and is in a lower tax bracket).

Can Play Catch Up on Contributions

If you’ve delayed opening an RESP or haven’t contributed enough to get the maximum grant amount each year, you may still be able to take advantage of government grant money.

With the carry-forward option, you can double up on contributions to catch up on missed grant money. But, you can only use one previous year’s worth of contribution room each year. Read Playing Catch-Up With RESPs for more information on carrying forward RESP grants.

Contributing to an RESP

There is no limit on how many RESPs one beneficiary can have in their name, but there is a lifetime contribution limit of $50,000 per beneficiary. This limit includes all contributions made in all RESPs combined, but doesn’t include grant and investment income.

You can generally contribute for up to 31 years. An RESP has a maximum life of 35 years. At the end, the plan must be closed.

Overcontributing to an RESP

When the total contributions made to a beneficiary in one or more RESP(s) exceed the lifetime limit of $50,000, you must pay a 1% per month penalty on your share of the over-contribution until it is withdrawn. For more information, visit the My Account for Individuals section of the CRA website.

Withdrawing from an RESP

RESP contributions and EAPs (Education Assistance Payments, or amounts paid to a beneficiary from an RESP to help finance the cost of post-secondary education) are taxed differently:

• Because the subscriber already paid taxes on contributions, this money can be withdrawn without any taxes owing.
• No taxes are paid on EAP money until it is withdrawn. Once withdrawn, EAPs are taxable to the beneficiary
• There is a $5,000 limit applied to EAP withdrawals in the first 13 weeks of schooling.

If a child chooses not to continue their education after high school, you can wait and see if they change their mind. RESP accounts can stay open for up to 35 years. After this, the plan must be closed.

RESP Transfers

If you know the beneficiary will not use the RESP money in the future, you can transfer it to another RESP. Most of these transfers have no tax implications. Speak to your tax advisor before making a transfer.

Opening an RESP

Ready to open an RESP? Great! You’ll need the child’s SIN and your own SIN to get started.

 

The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.

¹ Statistics Canada. https://www150.statcan.gc.ca/n1/daily-quotidien/180905/dq180905b-eng.htm. Accessed December 4, 2019.