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RESPs

Posted By: Anonymous

By Nizam Shajani, CPA, CA, MBA, Partner

Registered education savings plans managed effectively will allow for $7,200 in grants for education purposes plus an additional $800 for Albertan’s for a total of $8,000 (per child) towards a child’s education that can grow tax deferred.  In addition – to someone at the highest tax bracket, the grant would have a potential tax savings of an estimated $6,778 as the gains on the withdrawals (based on a 5% annual gain on the investment) would be taxed in the assumed lowest tax bracket of the child.  To receive this, a contribution of $2,500 per year for 15 years would need to be made for a total of $37,500 that could accumulate to withdrawals of $85,916 over four years base on an annual gain of 5% per year on the investment.  The maximum contributions per RESP account is $50,000 per child. 

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 the 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a tax deduction for contributions to a RESP – however, money put into a RESP grows tax deferred and the principle money withdrawn (funds contributed) from a RESP are withdrawn tax free, while income earned is taxed to the recipient child.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.

Based on the primary caregiver’s net family income – additional CESGs are available for an additional 20% on the first $500 put into the RESP where the net family income is less than $43,561 or an additional 10% on the first $500 put into the RESP where the net family income is between $43,561 and less than $87,123 - with the lifetime maximum grant of $7,200 still in place.

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

In addition – the Alberta centennial education savings plan will deposit $500 into the RESP of any child born to (or adopted by) Alberta residents in 2005 or later – plus add $100 into the account of a child who has a parent or guardian who was an Alberta resident in the years they turn 8, 11 or 14 years old in the years after 2005.  This will allow for an additional $800 of grants in the RESP.

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 – as treaties such as the tax treaty between Canada and the US have no withholding tax deducted from those dividends for RRSPs and RRIFs or other retirement income – or allow for foreign tax credits on such investments that have withholding tax in the foreign jurisdiction.  However the withholding tax is paid on investments held in RESPs (and TFSAs) – and you cannot claim an offsetting foreign tax credit because you pay no Canadian tax on RESPs (or TFSAs).  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.  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.

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