Registered Education Savings Plan

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A Registered Education Savings Plan (RESP) is an effective way of financing post secondary education for children. RESPs are registered by the Government of Canada to allow savings for education to grow tax-free until the person named in the RESP enrolls in post-secondary education.[1] An RESP is a contract between an individual (the subscriber) and a person or organization (the provider).[2] Under the contract, the subscriber names one or more beneficiaries and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries.[2]

The federal government and some provinces provide incentives to encourage RESP contributions, yet just over half of children age 0 to 17 in the Canadian population have ever received a RESP-related federal grant[3] [4]; in other words, there are no RESPs opened for the other half of children, despite the "free money" being offered and the ever-increasing importance, and high cost, of post-secondary education. Encouragingly though, the RESP participation rate has steadily increased from 20% in 2000 to 52% in 2017.[3]

This article first mentions the high and rising costs of post-secondary education. It then describes the main RESP features, including government incentives that can reach a total of 30% of contributed funds in some provinces. The article goes on to explore the three types of RESP accounts, i.e. family plan, individual plan, and group plan. There are three types of payments that can be made from an RESP and these are described next. The last sections of the article compare RESPs with TFSAs and suggest ideas for RESP portfolios.

Costs of post-secondary education

Main article: Financing an education

Post-secondary education is expensive, especially if the student lives away from the family home. Historically, tuition costs have risen faster than general inflation.

Given these costs, planning ahead is typically necessary and RESPs can be the ideal vehicle for education savings.

RESP features

  • A RESP is similar to a Registered Retirement Savings Plan (RRSP) in that they allow money to grow tax-free. The major difference is that you do not get a tax deduction when you deposit money into the account.
  • There are no restrictions on who can be the original subscriber under an RESP.[5]
  • There are no annual limits for contributions[6] (there were annual limits before 2007) to an RESP. For 1996 the limit was $2000 and for 1997-2006 the limit was $4000.
  • There is a current lifetime contribution limit of $50,000 for each beneficiary. For 1996-2006 the limit was $42,000.[6]
  • Lower income families are also eligible for the Canada Learning Bond[7], a supplementary grant of $500 plus $100 for each year of a child's life through age 15, for a maximum total amount of $2000.
  • The account has a maximum contribution term of 32 years and must be completed by the end of the year that includes the 35th anniversary of the opening of the plan[8], with some rare exceptions called specified plans[9].
  • Funds can be withdrawn to pay for post-secondary education. Accumulated income and government grants are then taxed in the hands of the beneficiary. As most children have low incomes, withdrawals are likely to be taxed lightly if at all. Any contributed principal can be withdrawn tax-free by the original contributor.
  • If the beneficiary does not continue with an education beyond high school, government grants must be repaid and principal returned to the contributor. Accumulated income is taxable (at a penalty rate) in the contributor's hands, although tax may be deferred by contributing the funds to an RRSP.

Canada Education Savings Grant (CESG)

Main article: Canada Education Savings Grant

Employment and Social Development Canada provides an incentive for parents, family and friends to save for a child's post-secondary education by paying a grant based on the amount contributed to an RESP for the child. The CESG money will be deposited directly into the child's RESP.[10]

  • The federal government will deposit a Canada Education Savings Grant[10] when contributions are made for children up to age 17.
  • Only the first $2,500 of a contribution will be matched in any one year, typically at 20% with some increment for lower income families.
  • The lifetime maximum CESG is $7,200.
  • There are provisions for accumulation of unused CESG room to be carried forward.

To get the lifetime maximum CESG, you have to contribute $36k to a RESP. You could for example contribute $2500 per year for 14 years, and $1000 for one final year.[11] Or if your budget is tight, perhaps contribute $2117.64 a year for 17 years.

Provincial incentives

Certain provinces encourage families to plan and save for their children's post-secondary education by offering incentives to open an RESP. Currently British Columbia (BC Training and Education Savings Grant) and Quebec (Québec Education Savings Incentive) offer such incentives. The Saskatchewan program (Saskatchewan Advantage Grant for Education Savings Program) is currently suspended. Formerly there was an Alberta Centennial Education Savings Plan, which is now closed.[12] See Provincial Education Savings Programs for further details.

Types of RESP

There are three types of RESPs: family plans, individual plans, and group plans. The latter are not popular with members of the Financial Wisdom Forum due to their high fees, sales charges, and lack of flexibility. See also the articles listed below under external links, which compare different types of plans.

Once again, before you open a RESP of any type, inquire about all types of fees and charges, to avoid situations such as those:

  • One BC resident has calculated that the "RESP he set up 11 years ago for his son had made more money for the fund’s managers and advisors than it returned to his child".[14]
  • A Calgary resident was told by his group RESP provider that he would only get back $2k of the $8k he contributed, because of sales charges.[15]

There are very low cost self-directed options available -- using family plans or individual plans -- with no sales charges, and which allow you to keep almost all of the returns, and they are discussed later in the article.

Family plan

  • You can name one or more children as beneficiaries.
  • They must be related to you either through birth or adoption.
  • Any or all of the children named in the plan can use the money.
  • You — or a financial advisor — decide how to invest the money.
  • Wide range of investment options.

Individual plan

  • There is one beneficiary who does not have to be related to you.
  • The beneficiary can be an adult, including yourself.
  • You — or a financial advisor — decide how to invest the money.
  • Wide range of investment options.

Group plan

  • Administered by a group plan dealer.
  • Investments normally limited to fixed-income securities, such as GICs, T-bills and bonds.
  • You are often required to sign a contract committing to regular contributions.
  • Savings are pooled and the amount of money each pool member receives depends on how much money is in that pool.
  • You can name only one child as beneficiary.
  • If the beneficiary does not go on to post-secondary education, you will get back only what you put into the plan.
  • Group plan RESP dealers are not insured against insolvency by an investor protection fund.[16]

Tax on over-contribution

  • An over-contribution[17] occurs at the end of a month when the total of all contributions made by all subscribers to all RESPs for a beneficiary is more than the lifetime limit for that beneficiary.
  • Each subscriber for that beneficiary is liable to pay a 1%-per-month tax on his or her share of the over-contribution that is not withdrawn at the end of the month. The tax is payable within 90 days after the end of the year in which there is an over-contribution. An over-contribution exists until it is withdrawn.

Payments from an RESP

The promoter can make the following types of payments: refund of contributions[18], educational assistance payments (EAP)[19] and accumulated income payments (AIP)[20].

Refund of contributions

  • Original contributions can be withdrawn tax-free, and paid by the promoter to the subscriber or to the beneficiary (student), when the student is enrolled in post-secondary education. There is no limit to the amounts of such withdrawls[21]
  • If the beneficiary is not yet enrolled in a qualified educational program at the time of withdrawing the original contribution, Canada Education Savings Grant amounts received by the plan may need to be returned to the government.[21]

Educational assistance payments (EAPs)

  • An EAP is the amount paid to a beneficiary (a student) from an RESP, to help finance the cost of post-secondary education. An EAP consists of the Canada Education Savings Grant, the Canada Learning Bond (CLB), amounts paid under a designated provincial program and the earnings on the money saved in the RESP. Specific situations apply under which EAPs are paid.
  • EAPs are limited to $8000 (previously $5000) during the first 13 weeks of full-time study[22]
  • Then, the limit becomes "the total educational expenses"[23], broadly considered.[24]
  • Despite this, the Canada Revenue Agency (CRA) sets an annual threshold for EAPs as a guideline for promoters. As of 2023, the threshold is $26,860. If the total of EAPs requested exceeds the annual threshold, the promoter must determine the reasonableness of the expenses.[22]
  • The student has to report the EAP on his income tax return for the year. However, if the student's total taxable income is low, little or no tax will be payable. Furthermore, the student may use tuition tax credits and education tax credits to offset the income.[25][26]
  • When withdrawing from a family plan RESP, attention must be paid not to exceed the maximum limit of $7200 CESG paid per beneficiary.[23]

Accumulated income payments (AIPs)

  • An AIP is an amount, usually paid to the subscriber, of the income earned from an RESP.
  • AIPs are paid when the RESP is not going to be used by the beneficiary for qualifying educational programs.[25]
  • Specific conditions apply and the payment will be treated as income and is subject to two different taxes: the regular income tax and an additional tax of 20% (12% for residents of Quebec).
  • One way to avoid tax is to transfer up to $50k of earnings to your RRSP, if there is contribution room available[21]

Planning the withdrawals

When beneficiaries become teenagers approaching the age of post-secondary education, the subscriber should find out which proportion of the account represents contributions and which proportion represents future EAPs. The RESP promoter should be able to provide this information. Or, future EAPs can be calculated by subtracting the total contributions from the current account value.

For example, if the account value is $60k and you've contributed $40k, then obviously the future EAPs are worth $20k at this stage. In this example the EAPs can probably be paid to the beneficiary (student) over the first one or two calendar years of post-secondary education, without tax consequences, in the absence of other taxable income (check with a tax calculator to make sure).

The idea of withdrawing the EAPs early is to make that sure they are used.[24][26] If EAPs are larger, or if the student has other income, it might be advisable to spread out the EAPs out over a longer time frame to minimize taxes, but still you want to make sure to exhaust all EAPs from the account while the student(s) is(are) enrolled.

Any EAPs remaining in the RESP account when the last student has completed their degree could be taxed at very high rates[27][26]; see the Accumulated income payments subsection above. If you do find yourself with leftover EAPs after then end of the postsecondary program of the last child, you can wait until the 35th anniversary of the plan to take them out as AIP: perhaps one child will go back to school.

Your original contributions can be refunded (tax-free) at any time during the post-secondary program, so there is no rush to take them out early.

Special rules

There are few rules when you open an RESP. However, there are specific rules that apply when changing the beneficiary of an RESP or when transferring RESP property to another RESP. See Special rules - RESP for more details of these rules.

Transferring between institutions

Transferred between Registered Education Savings Plans (RESPs) held within different financial institutions requires the cooperation of the transferring and receiving RESP promoters.[28] There are multiple forms involved, HRSDC SDE 0088 (Form A); HRSDC SDE 0089 (Form B) and HRSDC SDE 0090 (Form C). Promoters must also submit accurate transfer transactions to the Canada Education Savings Program (CESP) system of Employment and Social Development Canada (ESDC). In addition, when undertaking the transfer, certain conditions are required to ensure that the beneficiary continues to be eligible for the educational incentives. The full PDF guide to the process is Chapter 3-1 in Registered Education Savings Plan (RESP) Provider User Guide.

Extra money available?

Beyond the amount that attracts the maximum CESG grant ($36k of contributions spread evenly with a maximum of $2500 per year, see above), should you still make RESP contributions if you have more money available to set aside for post-secondary education? Or should you invest it outside a RESP?

TFSA

If you have space in your Tax-Free Savings Account (TFSA), that could be used for additional education savings. One author makes the case that:

it is more profitable to save for your child’s education in a RESP by contributing just enough to get the maximum CES grant. But it now makes no sense to contribute the maximum 50K allowed to a RESP over time. It is better to channel any contribution that doesn’t receive a matching grant into a TFSA instead

— Ram Balakrishnan, TFSA versus RESP, Canadian Capitalist, February 28, 2008

The reason being that TFSAs are more flexible and that withdrawals are not taxed.

RESP frontloading

If all other registered accounts are already maxed out (a nice problem to have), then it might make sense to contribute more than the $36k needed to get all the CESG, perhaps all the way to the $50k limit of RESP accounts. This provides $14k of additional registered room for up to 35 years, a strategy called "RESP frontloading".[29]

In this scenario, you still contribute the usual $2500 every year for 14 years, and $1000 for one final year, to maximize CESG (total contributions = $36k), but you also contribute the additional $14k as soon as possible, perhaps in the first year, so that the extra money can compound as long as possible. You end up with a larger RESP, which is good if the student attends an expensive program, or if you intend to recuperate some of your contributions and mostly give the EAPs (grants and growth) to the student. But if the beneficiary does not attend post-secondary education, the tax problem is larger than it would have been without the front-loading strategy.

Lump sum

A much more extreme scenario consists of contributing the maximum of $50k in year 1 to the RESP (the “lump sum” strategy). This means that only one year of CESG, worth $500, will be received, and the rest of the $7200 offered in federal grants is lost (as well as any provincial grants beyond year 1). On the other hand, all of the investor's funds will compound for much longer without being taxed every year.[27] Whether this makes sense depends on investment returns, tax rates for the contributor and the student, and so on.

Self-directed RESP portfolios

Asset allocation

Main articles: Portfolio design and construction and Asset allocation

Keeping it simple: glide paths

The present section assumes that all RESP money is intended for post-secondary education and will be paid to the beneficiary at approximately known dates. When a child is born, we have a good idea when post-secondary education, if any, will begin: when the child is about 16-19 years old. At that stage, withdrawals from the RESP will start, and the RESP should clearly be invested in cash equivalents and/or short term fixed income (bonds or GICs).[30] But when the child is younger, a proportion of the RESP portfolio can be in equities.[30] One way to plan the transition from riskier assets with a higher expected return to a more conservative asset allocation is called a glide path. The US-based Bogleheads wiki offers the following Vanguard-inspired Education savings plans glide paths, where post-secondary education is assumed to start at age 18:

Percentages equity / fixed income / cash

Glide path Age 0 to 5 Age 6 to 10 Age 11 to 15 Age 16 to 18 Age 19+
Conservative 50/50/0 25/75/0 0/75/25 0/75/25 0/0/100
Moderate 75/25/0 50/50/0 25/75/0 0/75/25 0/75/25
Aggressive 100/0/0 75/25/0 50/50/0 25/75/0 0/75/25

When the start of post-secondary education gets near, the investor may turn to liability matching to guide the RESP portfolio.

More complex strategies

EAPs have to paid to the children attending post-secondary education, so that part of the RESP should be invested accordingly, for example using a glide path as discussed above. On the other hand, original contributions can be paid either to the contributor or to the beneficiary, at the decision of the contributor, depending on factors such as education costs, other savings and sources of income, family values, etc. Theoretically then, the chosen asset allocation for the original contributions will depend on the contributor's intentions. Some or all of these original contributions could be thought of as belonging to a retirement portfolio, and managed accordingly.

Implementation

Fees of all types must be minimized. Before opening an RESP account, find out if you are eligible to a provincial grant program, since some financial institutions do not offer all programs and this could influence your choice.

The chosen glide path can be implemented in a RESP mutual funds account or a RESP discount brokerage account, for example using simple index portfolios. The latter type of portfolio can be implemented with index funds or exchange-traded funds.[30]

Asset allocation ETFs could also be used, with the whole portfolio invested in a single ETF that is changed every 5 years to a more conservative one. For example, the 'moderate' glide path listed above could be approximated using the following Vanguard Canada funds from age 0 to 15 (see also [31]):

  • Age 0 to 5: Growth ETF Portfolio (VGRO, 80% equity/20% fixed income)
  • Age 6 to 10: Balanced ETF Portfolio (VBAL, 60% equity/40% fixed income) or Conservative ETF Portfolio (VCNS 40/60)
  • Age 11 to 15: Conservative Income ETF Portfolio (VCIP, 20% equity/80% fixed income)
  • Age 16+: Bond ETFs, GIC ladders, HISAs, etc.

If the approach of liability matching has been adopted, then fixed income ladders can be used, with bond/GIC maturity dates matching planned education expenses.

CDIC coverage

See also: Deposit insurance

Since April 30, 2021, RESP assets that are held in deposit accounts, such as bank accounts or a high-interest savings account, receive separate CDIC protection up to $100k.[32]

See also

References

  1. ^ Government of Canada, Canada Education Savings Program Terms and Definitions, viewed July 25, 2019.
  2. ^ a b Canada Revenue Agency, Registered Education Savings Plans (RESPs), viewed July 25, 2019
  3. ^ a b Employment and Social Development Canada, Canada Education Savings Grant Participation Rates by Province and Territory, viewed July 25, 2019
  4. ^ CBC News, RESPs: free money from government that half of Canadians don't ask for, October 8, 2016, viewed January 26, 2017
  5. ^ Canada Revenue Agency, Who can be a subscriber?, viewed November 13, 2021.
  6. ^ a b Employment and Social Development Canada, RESP contribution limits, viewed November 13, 2021.
  7. ^ Employment and Social Development Canada, Canada Learning Bond (CLB), viewed November 13, 2021.
  8. ^ Employment and Social Development Canada, Period that an RESP can stay open, viewed November 13, 2021.
  9. ^ Canada Revenue Agency, Plan Termination, viewed November 13, 2021.
  10. ^ a b Canada Revenue Agency, Canada Education Savings Grant (CESG), viewed November 2, 2013
  11. ^ Sandi Martin, RESPs For Any Situation(subscription required), Canadian MoneySaver, September 2021 issue
  12. ^ Employment and Social Development Canada, Closure of the Alberta Centennial Education Savings (ACES) Plan, March 26, 2015, viewed December 12, 2015
  13. ^ Employment and Social Development Canada, Choosing the right RESP brochure, viewed November 13, 2021.
  14. ^ CTV News Vancouver, Fees eat up child’s education fund, March 4, 2019, viewed August 3, 2019.
  15. ^ CBC News Calgary, Saving for your kids' education: A cautionary tale; A Calgary family issues a warning for parents considering group RESPs, published and viewed August 26, 2019
  16. ^ Ken Kivenko, Investor Protection -- Group Education Savings Plan (a.k.a. Scholarship Plans), Canadian Money Saver, May 2012 issue (subscription required)
  17. ^ Employment and Social Development Canada, Over-contributions, viewed November 13, 2021.
  18. ^ Canada Revenue Agency, Refund of contributions, viewed November 11, 2021.
  19. ^ Canada Revenue Agency, Educational assistance payments (EAPs), viewed viewed November 11, 2021.
  20. ^ Canada Revenue Agency, Accumulated income payments (AIPs), viewed viewed November 11, 2021.
  21. ^ a b c Government of Canada, Using your RESP, viewed November 11, 2021.
  22. ^ a b Canada Revenue Agency (CRA), Registered education savings plan (RESP) Bulletin No.1R3, modified August 4, 2023, viewed September 29, 2023.
  23. ^ a b Employment and Social Development Canada, InfoCapsule: Educational Assistance Payment, viewed November 11, 2021.
  24. ^ a b MoneySense, 4 things to get right when tapping RESP savings, May 2017, viewed November 11, 2021.
  25. ^ a b TaxTips.ca, How Are The Funds Paid Out of The RESP, And Are They Taxable?, viewed January 26, 2017
  26. ^ a b c Jamie Golombek, How to best withdraw funds from a large RESP with minimal tax, Financial Post, September 16, 2021, viewed September 29, 2023.
  27. ^ a b Colin Ritchie, Putting The RRRRR! In RESPS – What to Do If Your Kids Aren’t Too Cool for School, Part 2 (subscription required), Canadian MoneySaver, October 2022 issue
  28. ^ CESP - RESP Provider User Guide: Transfers and Payments | ESDC, viewed November 12, 2021.
  29. ^ Financial Wisdom Forum, RESP Frontloading, read at least the first six posts (viewed August 17, 2019)
  30. ^ a b c Carrick R (2016) The ABCs of building an RESP using ETFs. The Globe and Mail, published October 21, 2016, updated April 6, 2017, viewed May 4, 2019
  31. ^ MoneySense, Asset allocation ETFs can provide one-stop shopping for RESPs, March 22, 2019 viewed July 31, 2019
  32. ^ "NEW - FAQs about changes to CDIC deposit insurance". CDIC. Retrieved March 19, 2020.

Further reading

There have been a number of discussions about RESPs that might be useful to help understand the nuances of RESPs.

External links

RESP basics and post-secondary education

Provincial grants

Types of RESPs

  • Informetrica Limited, Review of Registered Education Savings Plan Industry Practices, report prepared for Human Resources and Social Development Canada
  • Canadian Capitalist, Is a Group RESP Plan Right for You?, March 26, 2007. Drawbacks of scholarship plans include: (i) lack of flexibility; (ii) "you’ll derive full benefit from the program only if your child attends a four-year degree program"; (iii) invested only in low-risk assets, even when your child is still a baby; (iv) many types of fees are involved.
  • Canadian Capitalist, Group RESP Plans are Loaded with Fees, January 21, 2013. "The bottom line over the first three years is quite simple. The self-directed RESP incurred a total cost of just $60. The group RESP incurred a total cost of $3,721."

RESP portfolios

RESP withdrawals

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