At some point, most parents want to begin saving for their childrens’ education. Between the savings account itself and the available government grants, this can be a complicated endeavor. In this article, I will outline the most important facts to know about the RESP (Registered Education Savings Account) and CESG (Canada Education Savings Grant).
Tax Implications
When you contribute to an RESP, you contribute out of your after-tax income. This just means that you don’t receive a tax deduction for your contribution. It also means your original contributions won’t be taxed when they are withdrawn later.
Investment income earned inside the RESP is taxable, but if the withdrawal is used by a student listed on the account, the income will be taxed on that student’s tax return. Since college and university students usually have low or no income and large deductions for tuition and books, they often end up paying no tax on these withdrawals. That means all the grant contributions and growth inside the RESP will often end up as tax-free income for the student.
Canada Education Savings Grant (CESG)
The CESG is perhaps the biggest incentive to open an RESP for your children. The CESG will match 20% of your RESP contributions, up to a maximum government grant of $500 per child per year. Grants not earned can be carried forward, so you can still receive them (up to $1,000 total per child per year) by contributing more in a later year. The lifetime maximum is $7,200, and any grants not received by end of the year the child turns 17 are forfeited.
There are a couple of additional facts to know about CESG:
Low-income families can receive extra (below are 2021 thresholds)
40% instead of 20% on the first $500 of contributions if your household income is under $49,020 (up to $100 additional CESG)
30% instead of 20% on the first $500 if household income is under $98,040 (up to $50 additional CESG)
The CESG isn’t a handout – it’s an incentive to get parents to work hard to make contributions to the RESP. With the lifetime maximum of $7200, if you are receiving only the base 20% of the grant, you will need to contribute $36,000 to your child’s RESP over 15 or more years to max out the grant. Even if you receive the maximum additional amount of $100 per year, you’ll still need to contribute $30,000 over at least 12 years to receive the entire $7,200.
Keep in mind when looking at the table above that although the amount you must contribute to max out the grant is high……
$2,500 per year can be quite manageable if you start EARLY!
From an investment perspective, the CESG is an immediate and automatic 20% return on your investment – before you even make any investment income. Where else can you invest and expect a guaranteed return that high?
Ways to Invest
Family or Individual RESP. Banks and investment advising firms can sell you either a family RESP or an individual RESP. If you have (or think you will have) more than one child, you will want to open a family RESP. There are benefits to this type of account:
Open one RESP account and list all your children as beneficiaries.
Allocate each contribution among your children however you wish (for example, allocate more contributions to older children to increase chances of maxing out your grant earnings).
All the funds in the account can be used by any of the children listed, so you do not lose unused grant money if, for example, one child decides not to attend post-secondary. The other children on the account can use those funds.
Funds from this RESP are not limited to certain schools or programs - this money can be used for any program at any legitimate post-secondary institution.
With either individual or family RESP, if none of your children attend post-secondary, you can withdraw all of your original contributions – unused CESG funds must be paid back, but you keep all of the investment income earned in the account. Remember, in this situation, you yourself will be taxed on the investment earnings.
Group RESP. A group RESP is a different type of plan; like a family RESP, you can enroll all your children under one account. However, in a group RESP, hundreds or even thousands of other parents will also be enrolled in the same “pool”. The benefit of this arrangement is the potential for bigger earnings; however, there are important considerations.
You may have seen warnings on the news and social media about these plans (also called pooled RESP or Scholarship Trust RESP). Here are the important points:
Group RESPs front-load their fees, so in the first couple of years you see little, if any, growth in your savings. This causes a lot of investors to pull out early!
The funds in some group RESPs can be used only for specific programs; ask about limitations in choice of schools or programs for your kids. One of the most common limitations is apprentice or trade programs.
If you violate contribution rules or withdraw from the plan early, you can lose part or all of your investment – the plan will refund only your contributions MINUS the high fees, and will keep your grant money and investment income.
If your ability to pay every contribution in full and on time is ever in doubt, these plans are not for you!
Families that stay in the plan until it matures reap the benefits because forfeited contributions, investment income, and grants are redistributed to the remaining members.
The bottom line here is that a group or pooled RESP or Scholarship Trust RESP will yield excellent returns – to the parents that are financially able to make every payment, stay in the pool until their child reaches post-secondary age, and receive a share from all of the families that pull out and lose their grants and income.
Some group/pooled RESP companies in Canada:
Heritage Education Fund / Knowledge First Financial (the largest)
Canadian Scholarship Trust (CST) Fund
Global Education Trust Plan
Children’s Education Funds Inc.
In Conclusion
For most families, a family RESP with an investment advisor of your choice will be the best way to go. With this option you'll have flexibility to contribute what you can, when you want to. You won't be limited to specific schools or programs. And you won't lose your investment if children choose not to attend school (though, as with any investment, there is always some risk of losing money for other reasons!) Your investment advisor can walk you through the plan setup, advise on the best way to fund your RESP, and answer your questions about the CESG or other concerns.