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Depending on the career your child dreams of pursuing, post-secondary education can cost as much as $100,000 or more. To help you support your child financially throughout his or her education, it is possible to contribute to a Registered Education Savings Plan (RESP), which is enhanced by generous government grants.
In this blog post, learn all about this simple investment account with multiple benefits!
What is an RESP?
As mentioned, RESP is an acronym for “Registered Education Savings Plan”. This account was put into place to help to save and grow your money, tax-free, for a child’s post-secondary education.
In Quebec, both levels of government provide grants based on your contributions and your net family income!
First, the Canada Education Savings Grant (CESG) is paid automatically according to your contributions and can reach up to $600 per year, for a lifetime maximum of $7,200 per child. The CESG rate varies between 20% and 40% depending on your net family income.
Second, with the Quebec Education Savings Incentive (QESI) you can receive up to $300 per year until you reach the maximum amount of $3,600. This grant is paid annually, and its rate varies between 10% and 20%, depending on your family income.
And finally, the Canada Learning Bond (CLB) is designed to encourage low-income families to open an RESP. It provides an initial payment of $500, no contribution needed on your end. Then, each year the child qualifies, an extra $100 is available, up to a maximum of $2,000.
Together, these grants can increase the RESP value by 30% to 60%!
True or False?
Now that we’ve given you a quick overview of the tax benefits of RESPs, it’s time to expand your knowledge by answering 14 popular questions about them.
1. Parents are the only ones who can open a RESP for their child.
FALSE
Anyone who wants to can open a RESP for a child dear to their heart; biological or adoptive parents, of course, but also a grandparent, uncle, cousin, guardian, or even a family friend. The person who opens the RESP becomes the subscriber and the designated child becomes the beneficiary.
2. It is possible to open a RESP for a child who is not a Canadian resident.
FALSE
According to the Income Tax Act (Canada), the RESP beneficiary must be a Canadian resident when the account is opened and when contributions are made.
3. You can start contributing to a RESP as soon as your child is born.
TRUE
In fact, it is even recommended! This will allow you to take full advantage of the benefits of a RESP, especially since your savings and grants will grow tax-free for a longer period of time, generating higher investment income.
4. If I open an RESP later in the child’s life or cannot fully contribute annually, the government grants can be carried forward to a future year.
TRUE
If you waited a few years after the child was born to open a RESP or were unable to contribute to get the maximum grants each year, you will be able to get your unused grant room back.
Note, however, that you can only use the equivalent of one year’s contribution room at a time.
In addition, in order to receive the CESG (federal grant), you must have started contributing to your Child’s RESP before the end of the calendar year in which your Child turns 15. Specifically, a minimum of $2,000 must have been contributed (without being withdrawn) or a minimum of $100 per year must have been contributed (without being withdrawn) for at least four of the years preceding the end of the calendar year in which the child turns 15 (1). For the QESI (provincial grant), special conditions also apply if the Child is 16 or 17 at the end of the taxation year (2).
Sources :
(1) Government of Canada
(2) Revenu Québec
5. A RESP has more benefits than a TFSA.
TRUE
With both a TFSA and a RESP, the interests generated are not taxable. However, the TFSA does not come with government grants that can add up to $12,800!
Nevertheless, if you don’t have children, the RESP is not the right investment vehicle for you and the TFSA may be a better fit. Learn more about it in this blog post.
6. RESP contributions are not tax deductible.
TRUE
The money you put into a RESP does not reduce your income for tax purposes and does not allow you to receive a larger return at the end of the tax year. However, the investment income generated is tax-sheltered.
7. Government grants stop when the RESP beneficiary turns 17.
TRUE
Once the beneficiary reaches the age of 17, you will no longer receive government grants. However, it is possible to contribute to a RESP up to 31 years after it was first opened to continue to grow your money tax-free.
Be aware that the RESP must be liquidated by the end of the calendar year in which the beneficiary turns 35!
8. Money in a RESP can only be used to pay for university education.
FALSE
A beneficiary does not have to go to university to benefit from the amount saved in a RESP. In fact, the funds can be used to cover various types of post-secondary studies: Diploma of Vocational Studies (DVS) Attestation of College Studies (ACS) Diploma of College Studies (DCS), and of course, university studies.
9. RESP funds can only be used to pay for the beneficiary’s tuition.
FALSE
EAPs (Educational Assistance Payments) paid to the beneficiary from the RESP can be used to pay for ALL expenses related to the beneficiary’s post-secondary education, including tuition fees, food, housing, transportation, school supplies, etc.
10. If the beneficiary decides not to pursue post-secondary education, the subscriber loses all of his or her money.
FALSE
In such a situation, rest assured, your capital belongs to you! For example, you can designate a new beneficiary for the RESP. The investment income that will have been generated can also be transferred to a personal RRSP. But you may have to pay back the grants!
11. RESP funds cannot be withdrawn until the beneficiary begins post-secondary studies.
FALSE
Money can be withdrawn from a RESP at any time. However, by withdrawing money before the beneficiary is eligible for EAPs (Educational Assistance Payments), you could lose the government grants, or even be forced to repay all or part of the grants you received…
12. All of the money invested in the RESP is paid to the beneficiary in the form of Education Assistance Payments.
FALSE
As noted above, the money invested in a RESP belongs to the subscriber who can use this (non-taxable) amount as he or she wishes when his or her contributions are returned to him or her according to the terms established at the time the account was opened.
The EAPs (Educational Assistance Payments) received by the beneficiary are made up of the interest generated and government grants!
13. Money received by the beneficiary through the RESP is not taxable.
FALSE
EAPs received by the beneficiary when he or she begins post-secondary education are taxable and must be reported in income. However, since the beneficiary will be in school at that time and will generally have a modest income, he or she will pay little or no tax.
14. The maximum amount that a subscriber can contribute to an RESP is $50,000.
TRUE
For the entire duration of the plan, the maximum contribution is $50,000. However, there is no annual maximum or minimum.
There you go! We hope that all of your questions about RESPs have been answered. If some aspects still remain unclear, don’t hesitate to contact us directly.
We’ll be happy to help you!