Understanding RESP rules and contribution limits

Tuition fees are trending upwards. In fact, in 2020, the average tuition fees at a Canadian University were $6,580, according to Statistics Canada. Especially for families with young children, the thought of paying for college or university can seem daunting. Fortunately, if you open a Registered Education Savings Plan (RESP), you’ll be able to put money aside and where it can grow, tax-free, for your children’s future.

If that wasn’t a good enough reason to invest, the federal government can even provide an additional grant on top of your RESP contributions. Sound like a good investment to you? Then here’s what you need to know about RESPs

What is an RESP?

As their name suggests, RESPs are used to save money for a child’s education. Any Canadian can open one – you don’t even have to be related to the child who will eventually use the money. As long as you know their Social Insurance Number, you can start a savings plan for any child in your life.

Here are some basic facts about RESPs:

• Your RESP’s growth is tax-sheltered while your money is in the account.

• You don’t receive a tax deduction when you contribute to an RESP.

• Earned income, grants, and bonds are taxed when taken out to pay for the child's education

• Taxes are paid by the student when money is withdrawn as an Educational Assistance Payment. Since students often have little or no income, the money withdrawn can be tax-free

• Because the child is the beneficiary of the RESP, and not the owner, any amount saved does not count as income if the child applies for scholarships, bursaries or other financial aid.

If you have contributed to an RESP for a child who decides not to continue their education after high school, you have some options. RESPs can stay open for 36 years, which gives you time to wait – they might change their mind. You can also transfer the money into a different RESP. Finally, if your RESP contributions are unused, they can be returned to you, and you will be taxed only on the income your money earned while it was in the RESP, at a rate 20% above your normal income tax rate.

Taxes may have to be paid when taking money out of the RESP, depending on the type of withdrawal:

• Educational Assistance Payments (EAPs) are the withdrawal of any earnings (interest, dividends, capital gains) and government grants and bonds. These withdrawals are taxed in the hands of the beneficiary (as income for the beneficiary), who will likely be subject to a lower tax rate.
• Post Secondary Education Payments (PSEs) are the withdrawals of the contributions made by the subscriber. These withdrawals are not taxed.
• Accumulated Income Payments are withdrawals of the income earned in the plan, but paid and taxed to the subscriber when certain conditions are met.

RESP Frequently asked questions

How much does the government contribute?

The Canada Education Savings Grant (CESG) is a federal program that will match 20% of any RESP contributions, to a maximum of $500 per child each year (Basic CESG). Children from middle- and low-income families are eligible for additional grants – either 10% or 20% extra (Additional CESG) is provided on the first $500 of annual RESP contribution. Additional amount is based on the adjusted income and can change over time as the adjusted income changes. The maximum CESG grant amount for each child (including additional grants) is $7,200.

If you are not able to contribute to your child’s RESP in any given year, you can carry forward unused CESG grant room, up to a maximum annual CESG grant of $1000. CESG grant room accumulates until the end of the year in which a child turns 17.

How does the CESG impact my RESP contribution?

The CESG is added on top of your RESP contribution, and it is paid directly into your child’s RESP account.

Is there a limit to what I can contribute to an RESP?

While there is no annual contribution limit for RESPs, there is a lifetime contribution limit of $50,000 per child. This includes all RESPs naming that child as a beneficiary. There is no limit to how many RESPs you can set up.

Is there a penalty for over-contribution?

Yes. If the total RESP contributions for your child exceed $50,000, you will have to pay one percent per month tax on your share of the over-contribution, until the excess is withdrawn from the RESP. If people outside your immediate family are contributing to RESPs for your child – grandparents or family friends, for example – you may want to remind them about the lifetime contribution limits.

Can I have more than one RESP?

Yes, you can set up more than one RESP. If you have three children, for example, you can set up an RESP for each of them. If your child has more than one RESP, however, it’s important to remember that the total value of all those RESPs cannot exceed $50,000.

If you’re thinking about starting an RESP for your child, your best bet is to have a discussion with your financial planner. And remember – the sooner you start saving, the more your money can grow, and the more secure your child’s future will be.