October 24, 2010

Learn About RESPs If You Have Kids

In Canada, governments really entice you to save for your children’s education. Especially if you are a low-income family, you must take advantage of all this free money.

Let’s start by looking at the Registered Education Savings Plan (RESP). Although the RESP is a bit complex, it can be pretty interesting for most families.

Here are some highlights of the RESP to help you get the most out of it:

Contributions Not Tax-Deductible: RESP contributions are not deductible from your income tax, contrary to those of an RRSP (Registered Retirement Savings Plan).

Grant and Bond: Instead, governments pay incentives to the RESP in the form of grant and bond.

Tax-Free Growth: money can grow tax-free while in the RESP.

Canadian Education Savings Grant Rate: from 2007, the basic Canadian Education Savings Grant (CESG) is 20% of the contributions. An additional CESG can boost the grant rate up to 40% depending on your income. These amounts are directly deposited in the RESP.

Canadian Learning Bond: Lower-income families can get the Canadian Learning Bond (CLB). The CLB is $500 the first year and $100 per year after that for up to 15 years.

You Get This Money Just for Opening an RESP. This is free money for your child that nobody can afford to waste.

Taxed at Withdrawal: At withdrawal, money from grants, bonds and accumulated income will be taxed in the hands of the student, not the subscriber. This is a great advantage. Because most young students don’t have enough income, they won’t pay any tax on these withdrawals. 

Money withdrawn from grants, bonds and accumulated income are called
Educational Assistance Payments (EAP).

Contributions Withdrawn Tax-Free: At withdrawal, contributions are returned to the subscriber without paying any tax.

Choose Which Portion to Withdraw: It’s possible to indicate what you want to withdraw: contributions (tax-free) or Educational Assistance Payments (added to student taxable income).

Contribution Limit: To be practical, the annual contribution limit is $2500 because you won’t receive any grant on contributions over this limit.

And this, even if, since 2007, there’s no more limit to the amount that can be contributed to an RESP.

However, for each recipient, there’s a $50,000 cumulative contribution limit. Moreover, the total lifetime grant is limited to $7200 per recipient.

Unused Grant Room: On the other hand, unused grant rights can be carried forward. This would allow you to claim previous years’ grant on top of this year’s grant.

However, you must respect a maximum of $1000 of basic CESG per year including deferred rights (after 2007).

So, if your unused grant rights permit it, your effective contribution limit would be $5000 ($2500 this year x 20% + $2500 previous years x 20% = $1000 max basic CESG).

Education after High School: If you believe that your child will go to college or university (continue education after high school), you probably should go forward with the RESP. This is the main reason to use the RESP despite the fact that there are several other conditions to respect.

Education Stopped after High School: If your child decides not to continue education after high school, you will still be able to withdraw your contributions from the RESP. Grant and bond money will be lost and there will be an extra 20% tax on accumulated income. There is also a possibly to transfer some money to your RRSP.

Payment Limit: There is a $5000 Educational Assistance Payments limit for the first 13 weeks attending an eligible program. After that, withdrawals are unlimited if a student continues to qualify.

Provincial Education Savings Programs: There are provincial Education Savings Programs in Alberta and Quebec that supplement the federal RESP. Make sure your RESP provider is also enrolled in the provincial program before contributing.


For more detailed information on the RESP, please consult these federal government’s websites:

CanLearn at

Human Resources and Skills Development Canada at

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