Helping you Build a Brighter Future for your Child’s Education
For Canadian families, a post-secondary education is one of the most significant investments in a child’s future. The Registered Education Savings Plan (RESP) is a powerful tool designed to make this goal more achievable. As of 2024, $6.2 billion in contributions were made to RESPs in Canada, with 583,079 annual beneficiaries withdrawing funds from these accounts. This guide will provide an overview of what an RESP is, how it works, and its key benefits to help you get started on your child’s educational savings.
The Basics of a Registered Education Savings Plan (RESP)
An RESP is a long-term savings plan that helps you save for a child’s post-secondary education. The main advantage of an RESP is that the money you contribute grows tax-free. This means you do not pay tax on the investment earnings as long as the money remains in the plan. When it’s time for the child (the beneficiary) to attend an eligible program, the money is withdrawn to help cover costs like tuition, books, and living expenses.
The great thing about RESP is that it’s not just for university, it can be used for a wide range of qualifying educational institutions, including:
- Universities and colleges
- Trade schools and technical colleges
- Apprenticeship programs
This flexibility means your savings are useful for many different career paths.
How RESPs Work
An RESP involves a few key players and components:
- The Subscriber: the person who opens the RESP to make the contributions. This can be a parent, grandparent, or a relative.
- The Beneficiary: this is the child for whom the RESP is opened. They will be the one to receive the funds for their education when they pursue post-secondary education.
- The Promoter: this is the financial institution that manages the RESP and its investment.
There are two main types of RESPs:
- Individual Plan: this plan has one beneficiary and can be opened by anyone for any child.
- Family Plan: this plan is for multiple beneficiaries who are all related to the subscriber by blood or adoption. The advantages here are that funds can be shared among the beneficiaries. For example, if one child doesn’t pursue post-secondary education, the other child can use their portion of the funds.
The money in an RESP can come from three sources:
- Your Contributions: the money you put in as the subscriber.
- Investment Growth: the returns earned on the investments within the RESP. This growth is tax-sheltered as long as it remains in the plan.
- Government Grants: this can be the most powerful amplifier of an RESP. The government provides money to match a portion of your contributions, essentially providing additional funds at no cost to you to apply towards education.
Why Choose an RESP? The Key Benefits
An RESP is more than just a savings account; it’s a powerful investment tool with unique advantages that make it an essential part of financial planning for education.
- Government Grants: One significant benefit is the government’s contribution through the Canada Education Savings Grant (CESG). The government will match 20% of your annual contributions, up to a maximum of $500 per year. The lifetime grant limit is a generous $7,200 per beneficiary, providing substantial “free money” to boost your savings. For lower-income families, the government offers additional grants like the Canada Learning Bond (CLB), which provides money even without any personal contributions.
- Tax-Deferred Growth: The money in an RESP grows tax-free until withdrawal time. This allows your savings to generally compound faster, leading to substantial growth over the long term without being eroded by annual taxes. When a beneficiary withdraws from an RESP, they are taxed on the investment earnings, however since students typically have little or no other income at withdrawal time, they often pay minimal, or potentially no, tax on these withdrawals.
- Accessible and Broadly Applicable Funds: Funds can be used for a wide range of eligible education expenses, including tuition, books, tools, and even transportation costs. Eligible programs aren’t just for universities; they include colleges, trade schools, and apprenticeship programs, making the RESP a versatile tool for many career paths.
Important Considerations
Contribution Limits
RESPs have a lifetime contribution limit of $50,000 per beneficiary. It is crucial to track this, as over contributions to an RESP, can result in a tax penalty of 1% per month on the excess amount. Keep in mind that the government grants and investment earnings do not count towards this limit.
Withdrawal Rules
When a student enrolls in a qualifying post-secondary program, they can begin making withdrawals from the RESP. There are two types of withdrawals:
- Post-Secondary Education (PSE) Payments: This is a withdrawal of the original contributions. They are tax-free. There is no limit on how much can be withdrawn as a PSE payment.
- Educational Assistance Payments (EAPs): This is a withdrawal of the accumulated grants and investment earnings. They are taxable to the student. The government sets limits on initial EAP withdrawals, which were recently increased in the 2023 federal budget. The maximum withdrawal limit is now $8,000 for the first 13 weeks of full-time study and $4,000 for part-time study. After the initial 13 weeks, there is no limit on EAP withdrawals.
What if the Child Doesn’t go to School?
Life happens, and sometimes a child chooses a different path. If the beneficiary of the RESP does not pursue post-secondary education, you have a few options:
- Wait and See: Since the plan can stay open for up to 35 years, you can simply wait. Maybe they’ll decide to go back to school later.
- Transfer to another RESP: If you have a Family Plan, the remaining beneficiaries attending post-secondary can continue to use the funds in the plan, and the grants earned for the beneficiary not attending school must be returned.
- Withdraw the Contributions: The original contributions can be withdrawn by the subscriber tax-free.
- Close the RESP: You can close the plan and withdraw the money. However, all government grants will be returned to the government, and the investment earnings (known as an Accumulated Income Payment, or AIP) will be taxable to the subscriber, subject to regular income tax plus an additional 20% penalty. To avoid this, you may be able to transfer up to $50,000 of the AIP to your Registered Retirement Savings Plan (RRSP), provided you have the contribution room.
The PHL Difference: RESPs and Alternative Investments
At PHL, we are your trusted ally in the Canadian mortgage landscape, empowering you to achieve financial success. While many RESP investors use mutual funds or GICs, some mortgage investment corporation (MIC) securities may be eligible to be held in registered plans, including certain RESP accounts, depending on the dealer/custodian and the specific security. If you’re considering MIC exposure inside a registered plan, our team can walk you through what may be available and how eligibility works with your provider.
As your trusted partner, our professional team brings decades of experience to manage these investments, offering a professionally managed, risk-aware, and disciplined approach for our investors. We believe in educating our clients and partners to foster long-term success, and we are committed to helping you make informed decisions with confidence.
To learn more about how you can get started on your investment journey, book a call with our Dealing Representatives.
DISCLAIMER: This article is for information purposes only, and you should not construe any such information or other material as legal, tax, investment, financial, or other advice. No representation or warranty of any kind, express or implied, is made regarding the accuracy, validity, reliability, or completeness of any information in this article. Nothing contained on this webpage constitutes a solicitation, recommendation, or offer to buy or sell any securities. Certain information on this webpage may contain certain “forward-looking information”, and these statements are not guarantees of future performance. Such forward-looking statements involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Past performance does not guarantee future results. Availability of MICs in registered accounts (including RESPs) may depend on the dealer, custodian, and the specific security. Certain eligibility requirements may be applicable.
