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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, a contribution of $3,333 per year for 15 years would need to be made for a total of $50,000.  The contributions would grow to an estimated $90,866 at the end of year 17 based on a 5% 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 $14,025 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 $22,762 in addition to the $7,200 in CESG provided to the beneficiary.

Table 1

 
RESP 21 Year Plan

 

Opening Balance  $                       –
Annual Contribution  $                2,500
ROI 5%
Withdrawals at Year 18  $              16,586
   
  Opening Contribution Return CESG Withdrawal Balance
Year 1                           –                   16,500                     –                500                            –                17,000
Year 2                  17,000                      2,500                  850                500                  20,850
Year 3                  20,850                      2,500              1,043                500                  24,893
Year 4                  24,893                      2,500              1,245                500                  29,137
Year 5                  29,137                      2,500              1,457                500                  33,594
Year 6                  33,594                      2,500              1,680                500                  38,274
Year 7                  38,274                      2,500              1,914                500                  43,187
Year 8                  43,187                      2,500              2,159                500                  48,347
Year 9                  48,347                      2,500              2,417                500                  53,764
Year 10                  53,764                      2,500              2,688                500                  59,452
Year 11                  59,452                      2,500              2,973                500                  65,425
Year 12                  65,425                      2,500              3,271                500                  71,696
Year 13                  71,696                      2,500              3,585                500                  78,281
Year 14                  78,281                      2,500              3,914                500                  85,195
Year 15                  85,195                      1,000              4,260                200                  90,655
Year 16                  90,655                             –              4,533                   –                  95,187
Year 17                  95,187                             –              4,759                   –                  99,947
Year 18                  99,947                             –              4,997                   –                  16,586                88,359
Year 19                  88,359                             –              4,418                   –                  16,586                76,191
Year 20                  76,191                             –              3,810                   –                  16,586                63,415
Year 21                  63,415                             –              3,171                   –                  16,586                50,000
                      50,000            59,142            7,200                  66,342  
Tax Savings                          22,762

 

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. © 2021 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.