What is an RESP?

Saving for your child's future is difficult. Similarly being sure that money saved is adequately utilized can be a confusing and daunting task.

Did you know that in 2021 the average annual tuition cost for an undergraduate degree was $6,693? That’s not even taking into account food housing and transportation. Have you started saving for your child’s education?

A Registered Education Savings Plan allows parents and guardians to start investing in their child’s post-secondary education from the day of birth while receiving help and tax benefits from Canada's RESP government program. This guide will lay out what an RESP is, how to create and contribute to an RESP account and the benefits of starting an RESP today.

What is an RESP account?

RESP stands for Registered Education Savings Plan. It is a Canadian government program that was created to assist parents and guardians to save for their child's future education. By creating an RESP account, holders can make contributions that build up tax-free earnings.

The RESP Canada government matching program will also match funds up to a certain amount for children under 18. Opening an RESP account is simple and can be done at a bank, credit union or other financial institution. What’s best is that anyone can contribute once the account is created so family and friends can contribute to the future of the child.

How does RESP work?

RESPs are registered accounts with a designated subscriber, promoter and beneficiary. Each role plays a key, and the three work together with the Government of Canada to provide financial assistance.

• The subscriber is the person who opens the RESP account. They create a contract with a promoter. They, along with friends and family, can then make contributions to the RESP account. These contributions cannot be deducted from their income on their income tax and benefit return.
• The promoter is the financial institution that pays out when money is needed by the beneficiary for post-secondary education. This money is the total of the contributions and income made by the subscriber. The promoter will also apply for the CESG and CLB grants. The income earned by the RESP contributions is paid as EAPs, or Education Assistance Payments. EAP income is not taxable making any money earned by the RESP not taxable.
• The beneficiary is the child or children that will receive the contributions and EAPs from the promoter. Beneficiaries will include EAPs on their yearly income but will not have to report contribution growth while it sits in the RESP account.
• But there is also a fourth party at play, the Canadian government match RESP contributions through the Canada Education Savings Grant or CESG. This grant matches 20% of contributions up to a max of $500 per year and $7,200 total.

The accumulation of these funds is then paid to the beneficiary at the time of post-secondary education. Any remaining amount can be returned to the subscriber. The subscriber does not have to include these returned contributions on their income.

RESPs can hold both fixed-income and equity investments. This means that the RESP can grow tax-free as it holds bonds, GICs, cash, stocks and ETFs and mutual funds.

How can I open an RESP account?

To open an RESP both the subscriber and the beneficiary will need to be Canadian residents with a Social Insurance Number or SIN. The next step is to find a promoter.

There are many different RESP promoters and plans. A promoter can be a bank, trust or other financial institution. These promoters will then invest the subscriber's contributions and apply them for any grants they qualify for. Promotors charge fees and invest contributions based on the different plans they provide. This means that subscribers need to compare multiple promoters and plans to find the right one for them.

Once the promoter is selected the subscriber will decide what type of RESP they would like to create and how they would like to invest their contributions. Creating the account will then depend on the promoter and should be discussed between the two parties.

If you need assistance finding the right RESP promoter, a financial advisor can help. The earlier you start saving, the more you will have to fund your children's education.

What are the three types of RESPs?

There are main types of Canadian RESPs: Individual, Family and Group RESPS. Here's how they work:

• Individual: Individual RESP plans are created for one child. Anyone can choose to open an individual RESP for a child and is not required to be a parent.
• Family RESP: Family RESP accounts can include multiple children and contributions can be shared between them in varying amounts. This allows families to prepare contributions according to age and how soon beneficiaries will need to collect financial assistance. Having multiple beneficiaries on one account does not limit the RESP government matching funds. Each beneficiary will still be eligible for up to $7,200 of government matching assistance.
• Group RESP: Group RESP plans are offered by RESP companies that pool contributions from unrelated subscribers. The promoters then payout funds based on an agreed-upon maturity date based on the beneficiary's age.

These are the types of RESP accounts. An RESP account, once created, can be used to save and invest in a number of ways depending on the promoter.

What are the best RESPs accounts?

Unfortunately, this is not an easy question because the best RESP account will depend on the promoter that is used and the desires and goals of the subscriber. Each promoter offers a different RESP account that has different fees and benefits. Subscribers should look into top promoters before deciding on an account.

Popular promoters include:

• Questrade RESP
• Wealthsimple RESP
• Justwealth RESP
• CL Direct Investing RESP
• RBC Royal Bank RESP
• Knowledge First Financial RESP (KFF RESP)

These are just a few of the more popular RESP promoters. They offer a variety of RESP Canadian accounts to meet subscribers' needs and expectations.

What can an RESP be used for?

RESP accounts can be used to help pay for the costs of post-secondary education. Post-secondary education includes universities, colleges, trade and vocational schools. One common misconception is that RESPs can only be used to pay for tuition costs. In reality, RESP money can be used to cover any cost associated with post-secondary education.

Eligible post-secondary education expenses include meals, living expenses, travel expenses to and from college, school materials such as books and laptops, as well as tuition and other student fees. This makes RESPs extremely flexible and powerful for students who cannot work full-time while pursuing higher education.

How to withdraw from RESP?

To start withdrawing money from an RESP the subscriber must first contact the RESP promoter. They will verify proof of enrollment before issuing the Education Assistance Payments (EAPs). They will also provide a list of pre-approved expenses that the payments can be used. They may also ask for receipts on purchases.

RESP promoters are responsible for administering EAPs under the Income Tax Act and determining what is considered a reasonable education expense. Most RESP promoters will provide guidelines of what is considered a reasonable expense before the RESP account is created. Subscribers should look into these guidelines when deciding on their RESP account promoter.

RESP withdrawal limits

If the beneficiary is enrolled full-time in post-secondary studies, Education Assistance Payments are limited to $5,000 in the first 13 weeks of enrollment. After this period, any amount is available for withdrawal as long as the beneficiary stays enrolled in their studies.

If the beneficiary is enrolled part-time in post-secondary studies EAP is limited to $2,500 for every 13-week period of enrollment.

Who can contribute to an RESP?

Anyone can contribute to a beneficiary RESP account provided they have the beneficiary’s SIN. This can include friends, family and even employers of the subscriber. An employer can contribute to a beneficiary if the subscriber is an employee. The contribution would be deducted from payroll providing there is a contract between the employee, employer and RESP provider.

What is the maximum RESP contribution per year?

There is no RESP annual maximum contribution. However, there is a lifetime contribution of $50,000 per beneficiary. It is also beneficial to contribute $2,500 per year for up to 15 years to collect the full amount of RESP Canadian government matching through the CESG as a full lump sum in one year will only receive $500 to $600 in grant assistance.

How much does the government contribute to RESP?

Through the CESG, or Canada Education Savings Grant, the government will match a portion of contributions per year and a maximum amount over the lifetime of the account. This amount is based on contributions made and the family income and RESP matching is designed to incentivize families to contribute a certain amount per year to receive the maximum RESP Government of Canada matching amount.

Canada Education Savings Grant Summary chart

Family income 2021	$50,197 or less	Between $50,198 and $100,392	More than $100,393
First $500 RESP contribution	20%=$100	10% = $50	Not eligible
Maximum CESG on the first $2,500	20%=$500	20% = $500	20% = $500
Maximum yearly based on income and contributions	$600	$550	$500
Lifetime Maximum CESG	$7,200	$7,200	$7,200

How long can you contribute to an RESP?

Subscribers can contribute to an RESP account for up to 31 years and the account will remain open for a maximum of 35 years. However, the CESG will only contribute to the account until the beneficiary turns 18. This means that subscribers can continue to contribute after the beneficiary turns 18 if they plan on attending post-secondary school later.

How to check the RESP contribution room?

With a maximum RESP contribution of $50,000, it can be difficult to keep track of your remaining available contribution amount or RESP contribution room. To check this number contact Employment and Social Development Canada ESDC at 1-888-276-3624 between 8:00 am and 5:00 pm ET, Monday through Friday.

What happens to an RESP if is not used?

There are several options in the event an RESP is not used.

• Subscribers can leave the RESP open for up to 36 years giving the beneficiary the option of continuing their education at a later date if they so choose. This also protects the money from taxes until a decision is made.
• Subscribers can choose to replace the beneficiary. If it is an individual plan, the subscriber can name a new beneficiary. If it is a family plan you can use the sum of the plan to pay for a different beneficiary’s education. That beneficiary is still limited to the $7,200 maximum RESP grant. If it is a group plan the promoter must be contacted to find out if the plan can be transferred to a beneficiary without paying a fee.
• Subscribers can transfer the RESP to their RRSP tax-free if certain qualifications are met. The RESP must have been open for at least 10 years, all beneficiaries must be 21 or older and not continuing their education, and the subscriber has room to add the funds to their RRSP.
• The beneficiary can transfer the RESP into a Registered Disability Savings Plan or RDSP if certain qualifications are met. Both accounts must be under the same beneficiary, the beneficiary has a mental impairment that prevents post-secondary education, the RESP has been open at least 10 years, and the beneficiary must be at least 21 years old.
• The subscriber can also close the RESP account and return all contributions to themselves tax-free. In this case, all grants and bonds provided by the government will be returned as the money is no longer being used for post-secondary education. If the account has been open for 10 years, the beneficiaries are at least 21 years old and are not currently continuing post-secondary education the subscriber can keep any investment earnings made in the RESP account.

These options may depend on the RESP account type and terms agreed upon with the promoter. Subscribers should ask what their options are if their RESP is not used before making the RESP account.

What tax rules apply to an RESP?

RESPs are designed to limit the taxation on contributions while the money is in the RESP account. Allowing the full use of contributions by beneficiaries.

• Any growth of invested contributions will be tax-free while in the RESP account.
• A common question is are RESP contributions tax-deductible? Unfortunately, subscribers can not get tax deductions for contributions as it is not a donation.
• The money that contribution investments earn will not be taxed until withdrawn.
• When money is withdrawn by beneficiaries as EAPs it is taxed as income. Since this may be the only source of income for the beneficiary it will most likely be tax-free.
• If the money is returned to the subscriber it is tax-free.

What is EAP in RESP?

An Educational Assistance Payment or EAP is the amount paid to a beneficiary of an RESP account. This money can only be used to help pay for the cost of post-secondary education. These costs can be with living expenses, travel, materials and student fees associated with enrollment.

Have some remaining questions about RESPs? A financial advisor can help you sort them out.