– When an RESP matures, the beneficiary of the plan (usually the child for
whom the plan was opened) can withdraw the funds for post-secondary
tuition. Because they will likely be in a very low tax bracket, little or
no tax will be payable on the withdrawals. That’s what makes starting an
RESP early so attractive.
Anyone may open an RESP for a child, provided the child has a Social
Insurance Number. Typically parents and grandparents open RESPs when the
child is very young (often grandparents will gift a newborn with an RESP).
Funds invested in the plan grow tax-free until withdrawn to pay for
tuition. There is no annual limit for contributions, but there is a $50,000
total lifetime limit that can be contributed for a single beneficiary.
Excess contributions are subject to tax at a rate of 1% per month, so it’s
important to keep track of who is contributing what amounts to a given
It’s important to choose the RESP that’s right for you. You can open a
self-directed RESP at most financial institutions. A number of RESP
promoters also offer group plans. In either case, it’s absolutely vital
that you are aware of the contribution rules in general. In the case of
group plans, you must be aware of any rules that the promoter has set out
that apply to their plan in particular, especially those that relate to
frequency or size of contributions, fees, penalties, and withdrawal rules.
Bear in mind that an RESP is not like a savings account or an ATM machine.
Once you sign up, you are legally required to follow the rules, just like
an RRSP or TFSA.
One key feature of the RESP is the Canada Education Savings Grant (CESG),
which is a grant made by the federal government amounting to 20% of annual
contributions to all eligible RESPs to a maximum $500 (up to $1,000 if
there is unused grant room carried forward), to a lifetime limit of $7,200.
There is also an additional CESG amount available on the first $500
contributed to an RESP, ranging from 40% to 20% depending on family income.
Students can begin receiving payments (called Educational Assistance
Payments, or EAPs) towards tuition from the RESP as soon as they are
enrolled in a qualified post-secondary educational program, including
colleges and universities, apprenticeship programs offered by trade
schools, and CEGEP in Quebec. For Canadian residents, the payments consist
of funds contributed to the RESP and earnings on those funds, the Canada
Education Savings Grant (CESG), the Canada Learning Bond (CLB) for eligible
students, and any provincial savings programs the student may be eligible
A university or college outside Canada qualifies as a post-secondary
institution eligible for EAPs, provided the student has been enrolled
full-time in a course of not less than three consecutive weeks and remains
a resident of Canada.
But in order to receive the Canada Education Savings Grant or Canada
Learning Bond as part of the EAP, a student beneficiary must be a
“resident” of Canada. Residency requirements may also apply for provincial
grants and incentives.
So what qualifies as “residency”? Even if you are a Canadian citizen, the
Canada Revenue Agency stipulates that you are a non-resident for tax
purposes if you normally live in another country and are not considered a
resident of Canada. You are also considered non-resident if you not have
in Canada and you live outside Canada throughout the tax year or you stay in Canada for less than 183 days in the tax
year. This will be important for parents or grandparents whose
Canadian-citizen children live abroad.
In the case of grandparents looking to set up RESPs for grandkids living in
the U.S., it appears they’re out of luck. To qualify for RESP benefits, the
grandchildren would have to be residents of Canada at the time the RESP is
set up, and they would need to have Canadian Social Insurance Numbers. They
would also have to be residents of Canada to qualify for the CESG and be
eligible for other grants and incentives. And they would have to remain
residents of Canada to receive the full EAPs for attending a post-secondary
school outside Canada.
As for choosing the best types of RESPs, it makes sense to discuss various
plans with your independent financial advisor – that is, one who isn’t tied
to any particular RESP promoter. Given the recent news stories of people
who thought they had lost their RESP savings because they didn’t read the
fine print about making regular contributions through the years, an
analysis and review of your education savings goals by an unbiased third
party before you open a plan is critical.
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. Contact her directly by
phone at 416-828-7159, or by email at
for a confidential planning consultation.
Notes and Disclaimer
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The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.