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RESP Tax Plan

As we gear up for back to school for the little ones, it is important to prepare for the years after graduation.  If you anticipate your children will attend post-secondary education, planning for this costly period should be done years in advance.  And done correctly, this will save you tax dollars.

Registered education savings plans managed effectively will allow for a free $7,200 Grant (Canada Education Savings Grant (CESG)) to be used for education purposes towards a child’s education plus investments that can grow tax deferred.

The CESG is based on 20% of a $2,500 contribution made each year and available until the calendar year in which the beneficiary turns 17.  Contributions must commence prior to the year in which your child turns 15.  The maximum contributions per RESP account is $50,000 per child.  Note excess contributions are subject to tax of 1% per month, compounded.

In addition – to someone at the highest tax bracket, the grant would have a potential tax savings of an estimated $19,247 as the gains on the withdrawals (based on a 5% annual gain on the investment that would otherwise be taxed at 34.31% in the hands of the contributor) would be taxed in the assumed lowest tax bracket of the child.

To receive the maximum benefit, an initial contribution of $16,500 should be made, with subsequent contributions of $2,500 per year in years 2 through 14 and a $1,000 contribution in year 15 .  The contributions would grow to an estimated $112,000 at the end of year 17 based on a 6% return each year.

Note you will need to provide some documentation that the beneficiary is going to an approved school to make withdrawals, however the RESP can stay open for 35 years from the date it was initially opened.  If the beneficiary does not go to an approved school, there are taxes and penalties on the withdrawals.  However, there are strategies in place to help minimize this.

Withdrawals on contributions are not taxed.  Withdrawals on the accumulated income, including grants, interest, dividends, and capital gains are taxable to the recipient.  Students will have the tax advantage of the personal exemption, tuition tax credits and a lower tax bracket.  Withdrawals while the student is at these lower tax brackets are usually the most advantageous (assuming the student is in a lower tax bracket than their parents).

In our example, if the student were to take $20,893 into income in each of years 18, 19, 20 and 21, with the remaining $50,000 contribution returned to the initial contributor in year 21 – the tax savings (assuming the contributor is at the highest tax bracket and the student has no other income) would be approximately $28,674 in addition to the $7,200 in CESG provided to the beneficiary.

Table 1

 
RESP 21 Year Plan
 
Opening Balance  $                      –  
Initial Contribution  $             16,500
Annual Contribution  $               2,500
ROI 6%
Withdrawals at Year 18  $             20,893
   
  Opening Contribution Return CESG Withdrawal Balance
Year 1                          –                     16,500                    –               500                          –               17,000
Year 2                 17,000                     2,500             1,020               500                 21,020
Year 3                 21,020                     2,500             1,261               500                 25,281
Year 4                 25,281                     2,500             1,517               500                 29,798
Year 5                 29,798                     2,500             1,788               500                 34,586
Year 6                 34,586                     2,500             2,075               500                 39,661
Year 7                 39,661                     2,500             2,380               500                 45,041
Year 8                 45,041                     2,500             2,702               500                 50,743
Year 9                 50,743                     2,500             3,045               500                 56,788
Year 10                 56,788                     2,500             3,407               500                 63,195
Year 11                 63,195                     2,500             3,792               500                 69,987
Year 12                 69,987                     2,500             4,199               500                 77,186
Year 13                 77,186                     2,500             4,631               500                 84,817
Year 14                 84,817                     2,500             5,089               500                 92,906
Year 15                 92,906                     1,000             5,574               200                 99,681
Year 16                 99,681                           –             5,981                   –               105,661
Year 17               105,661                           –             6,340                   –               112,001
Year 18               112,001                           –             6,720                   –                  20,893               97,828
Year 19                 97,828                           –             5,870                   –                  20,893               82,805
Year 20                 82,805                           –             4,968                   –                  20,893               66,880
Year 21                 66,880                           –             4,013                   –                  20,893               50,000
                      50,000           76,372            7,200                  83,572  
Tax Savings                          28,674

 

 

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2022 Shajani LLP.

Shajani LLP is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.

Nizam Shajani, Partner, LLM, CPA, CA, TEP, MBA

I enjoy formulating plans that help my clients meet their objectives. It's this sense of pride in service that facilitates client success which forms the culture of Shajani CPA.

Shajani Professional Accountants has offices in Calgary, Edmonton and Red Deer, Alberta. We’re here to support you in all of your personal and business tax and other accounting needs.