RESPs

An RESP is an education savings account that is registered with the Government of Canada for parents (grandparents, other family members and friends) who want to save for a child’s education after high school.  The plan can be opened for an individual child or within a family plan where children are related by blood or adoption.  The advantage of a family plan is that earnings can be shared among children – including the Canada education savings grant.  The individual plan is also well suited where the child being saved for is not related to the contributor. 

Note that under the Income Tax Act, a “blood relationship” is that of a parent and child (or grandchild or great-grandchild), or that of a brother and sister.  Nieces, nephews, aunts, uncles and cousins are not considered blood relatives. Also, you cannot be considered a blood relative of yourself.

Group plans are also available – however plan rules should be read carefully and with caution as many have lost considerable amounts in group plans due to unclear convoluted rules.

You do not get a tax deduction for contributions to a RESP – however, money put into a RESP grows tax deferred and the principal money withdrawn (funds contributed) from a RESP are withdrawn tax free, while income earned is taxed to the recipient child.  Attribution rules also do not apply – allowing for a transfer of wealth without incurring tax.  

A significant benefit of opening an RESP is access to the Canada education savings grant (CESG).  The basic CESG provides a 20% grant up to a maximum of $500 on an annual contribution of $2,500.  There are carry forward provisions for missed years with a lifetime maximum grant of $7,200.  However, grants are only available on the first $2,500 contribution or $5,000 contribution on a catch up contribution in a year.

An additional 20% grant on the first $500 contribution is available where the family income of the beneficiary is less than $46,605 or an additional 10% grant is available on the first $500 contribution where the family income of the beneficiary is between $46,606 and $93,208.  All still subject to the maximum $7,200 total grant per beneficiary. 

The CESG is available until the end of the calendar year in which the child turns 17 as long as the child is a Canadian resident, the RESP is open in their name and a request is made for the grant.

The CESG can be withdrawn for the following programs that qualify:

• College
• University
• Apprenticeship program
• Trade school

To open an RESP account applicants must have a social insurance number (SIN) as well as a SIN for anyone named in the RESP as a beneficiary.  You will also need to select a provider – most financial institutions and certified financial planners provide RESPs.  

When selecting your investment in a RESP – you likely do not want your RESP to hold investments in foreign dividend type of income because treaties (such as the tax treaty between Canada and the US) have no withholding tax deducted from those dividends.   However, a withholding tax to the foreign jurisdiction is paid on investments held in RESPs.  As such, you do pay some tax on this type of investment. 

Effective investments for tax purposes within your RESPs would include Canadian interest generating income (although these are not necessarily investments that net you the most return). 

When RESPs are withdrawn – the contribution amount (the amounts contributed over the years) are withdrawn tax free.  The accumulated income (including grants, capital gains, interest, dividends earned and any money not considered a contribution) are taxed at the hands of the student.  In most cases – the student is at the lowest tax bracket or in a lower tax bracket than the parent (or contributor).  A strategy could be implemented to withdraw accumulated income when the student is not working to maintain the withdrawals in periods of lower income and lower taxation. 

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. ©2023 Shajani CPA.

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