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RESPs

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If you have kids and you expect that you might need to help them financially one day so that they may receive a post-secondary education, then you definitely want to learn about RESPs.

RESP stands for Registered Education Savings Plan. Money placed in an RESP is allowed to grow tax free for the eventual purpose of being used to pay for a child's university, college, or some other types of education (which includes tuition, housing, food, etc). Contributions to the account do not provide a tax deduction, but they do provide a grant from the government that goes straight into the account.  Withdrawals are taxed in the hands of the child, who would normally be in a low income tax bracket, and therefore would not incur very much in taxes. There are rules that govern how much can be contributed each year (per child) and what constitutes a valid educational program.

Tip: If you have (or are expecting) to have more than one child, use a 'family-plan' instead of an 'individual-plan'. That way when it comes time for the child to withdraw money, the pool of money can be allocated to each child in whatever way makes sense. Otherwise, if individual plans are used, then transfers can be complicated and possibly impose penalties in some cases. Given a choice, go for the family plan.

Tip: In addition to the federal grant, there are other incentives out there. For example, Alberta and Quebec offer additional incentives on top of the federal grants described below.  There is also the Canada Learning Bond (CLB) intended for modest-income families. See the links near the bottom for more information on these plans.

Setting it Up

You can either create your own RESP directly with your discount brokerage or bank, or go with a group plan.  You must be careful when going with a group plan, as the fine print may prevent you from using the money in a way that you expected. See the links below for more information about some of the pros and cons of group plans.

The Grant - How it is Calculated

The below describes how the grant is calculated using 2012 rules. For future years it should be very similar.

The BASIC Grant
  • does not depend on family income
  • is 20% of the amount contributed
  • up to $500 per year (unless you miss a year, then it is up to $1,000)
  • lifetime limit of basic + 'additional' grant is $7,200
The ADDITIONAL Grant
  • depends on family income
  • only applies to first $500 contributed
  • is an extra 20% if net family income is less than $42,706
  • is an extra 10% if net family income is more than $42,707 but less than $85,414
  • lifetime limit of basic + 'additional' grant is $7,200
See below for the Basic and Additional Grant described in table format!

Your Contribution
Amount		  Net Family Income
 < $42,706 $42,707 to $85,414  > $85,414
 $1 to $500  20% ($100) + 20% ($100)  20% ($100) + 10% ($50)  20% ($100)
 $501 to $2,500  20% ($400)  20% ($400)  20% ($400)
 > $2,500  0%  0%  0%
Total Maximum Grant for the Year  $600  $550  $500

Note - there are special rules concerning 16 and 17 year olds, so head on over to the CRA web page for the full details.

Important Notes to Remember

  • the lifetime maximum contribution you can make is $50,000
  • there is no limit to the amount you can contribute in one year (except for the lifetime maximum of $50,000)
  • no matter how much you contribute in one year, only the first $2,500 is eligible for a grant (unless you miss a year, and then first $5,000 is eligible)

Further Related Links and Articles 

Alberta Centennial Education Savings Plan - Alberta Ministry of Enterprise and Advanced Education
Canada Learning Bond - Human Resources and Skills Development Canada
The Old College Try - MoneySense