Registered Education Savings Plans (RESP)

The Canadian government offers grants to families who open and contribute towards their children’s RESP accounts. There are two types of federal grants provided: the basic Canadian Education Savings Grant (CESG) and additional CESG.

• Basic CESG: is a grant of 20% of contributions made to a beneficiary until the year they turn 18. The yearly grant limit is $500. To maximize the yearly grant, parents need to contribute $2,500 [$2,500 (contribution about) x 20% (matching rate) = $500, yearly maximum]
• Additional CESG: is an additional grant from the government to help save for your child's education. This grant is based on the net family income of the child's primary caregiver (the individual who receives the Canada Child Tax Benefit)

The government allows for a lifetime maximum contribution of up to $50,000 and up to $7,200 in grants per beneficiary (child).

The money in your RESP account consists of two portions:

• Post-Secondary Education Payments (PSE): the amount of after-tax dollars the subscriber (account holder) has contributed towards their child’s RESP account.
• Education Assistance Payment (EAP): the portion of the RESP that consists of federal and provincial grants, bonds, and investment income earned from dividends, capital gains, and interest. When money is taken from this portion and put in the hands of the student, it is called an Education Assistance Payment (EAP).

PSE (contribution amounts) can be withdrawn tax-free by the account holders (subscribers) since contributions are made with after-tax dollars.

RESP qualified investments include:

• Cash
• Stocks
• ETFs
• Long options
• Mutual funds
• Bonds
• Gold and silver
• GICs
• And more

Here are some of the most frequently asked questions:

1. What happens if my child doesn't continue on to post-secondary education?
   • Account-holders can withdraw their original contributions (PSE) tax-free and pay taxes on the earned income portion only
   • The remainder of the accumulated income (interest, dividends, and capital gains) is taxable at your prescribed tax rate for Federal and Quebec (if applicable) PLUS an additional 20% penalty tax (12% for Quebec residents)
   • Any government (federal or provincial) incentives (grant/bond) will be returned to the government if an RESP is terminated because the child doesn’t enroll in post-secondary education
   • Any investment income (up to $50,000) earned in the RESP can be rolled over into the account holder’s RRSP account (as long as there’s enough contribution room in the RRSP)
2. What is a family RESP account?

   • If you have (or plan to have) multiple beneficiaries (children), you can open a family RESP account for all beneficiaries and save by buying bigger share lots, rather than multiple lots in different accounts. To add multiple beneficiaries to a family RESP, all the beneficiaries must be blood relatives.

3. What if I want to close my account early?

   • If the account is closed early, any grants paid into the account must be returned to the government. The portion of the account that is made up of direct contributions (PSE or post-secondary education) can be withdrawn by the subscriber (account holder). Any earned investment income will be withdrawn by an accumulated income payment.

4. Withdrawing money from my RESP?
   

   • If you need to take money out of your RESP, the withdrawal is made by capital withdrawal (funds that have been contributed, not grants or income). Grants must be paid back to the ESDC unless you’re withdrawing money to correct an over-contribution, or if the beneficiary qualifies for EAP (Educational Assistance Program).
     

Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.