What is an RESP and how does it work?

Few things in life are more valuable — and potentially more expensive — than a good education. Fortunately, in 1974, the Canadian government created a tax-advantaged investment account to help people save specifically for post-secondary school.

What is an RESP (Registered Education Savings Plan)?

An RESP is a government-registered savings plan that allows you to contribute up to $50,000 which you can use to generate the capital required to fund increasingly expensive post-secondary education costs. Unlike a Registered Retirement Savings Plan (RRSP), contributions made to an RESP do not reduce your taxable income, which means you won’t get a tax refund as a result of your contributions. On the other hand, your child will likely not have to pay tax on the contributions you’ve made when those funds are withdrawn.

Some tax will still be owed for investment gains and government matching grants (which we’ll get to below). These funds are taxed based on the RESP beneficiary’s income and, given that the beneficiary is a student, the tax implications are typically minimal.

There are three main parties involved when it comes to establishing an RESP:

• The subscriber: Usually the parent.
• The beneficiary: The student who will eventually use these funds to pay for their education, usually the child the parent is funding.
• The promoter: The financial institution offering the account (e.g., TD Bank).

Types of RESP

Once you have decided to open an RESP, there are three different types to consider:

• Family plans: Family plans may be ideal for people who are preparing for the post-secondary needs of more than one person. Eligible family members include children, stepchildren, grandchildren and even brothers or sisters. When the funds are eventually allocated, they must be shared among those who pursue university or college but not necessarily in equal portions.
• Individual plans: Individual plans are designed for people with only one beneficiary in mind. The beneficiary is not required to be related to the subscriber.
• Group plans: Although also intended for one beneficiary, who may or not be related to the subscriber, group plans are subject to stricter regulations, including fixed payment schedules and penalties for missed contributions. These funds are combined with contributions from other subscribers — sometimes referred to as a pooled fund. The money is eventually dispersed amongst beneficiaries as each one begins their post-secondary studies.

RESP benefits

There’s a reason Canadians held a combined $78 billion in assets in RESPs in 2021 — these accounts work. ¹ By planning ahead and taking advantage of the built-in benefits, you can help mitigate the significant costs of post-secondary education.

• Tax-deferred growth: Growth in an RESP is tax-deferred, meaning taxes won’t be deducted until the beneficiary needs the funds to pay for their education. You won’t pay any tax on your original contribution money upon withdrawal.
• Canada Education Savings Grant: One of the RESP’s best features is the government grant, which was set up to encourage parents to plan for their child’s future. The Canada Education Savings Grant (CESG), is a federal program that matches 20% of a subscriber’s contributions (up to $500 per year or $1,000 if there is unused grant room from a previous year) until the end of the calendar year in which the beneficiary turns 17. There is a lifetime cap of $7,200 per beneficiary.
• Canada Learning Bond: Beneficiaries from lower-income families who were born after 2004 may also qualify for the Canada Learning Bond (CLB), a program that provides an initial contribution of $500 in the first year of eligibility and $100 per year for each additional year of eligibility up until the age of 15. There is a lifetime cap of $2,000. Depending on where you live, you may also be able to access even more assistance through provincial incentives.
• Flexible investing options: The money you contribute to an RESP can be invested in a number of different products, including mutual funds, Exchange-Traded Funds (ETFs), Guaranteed Investment Certificates (GICs), stocks and bonds. With a longer timeline, you can find the right mix of assets to suit your risk profile and grow your child’s education savings even faster. For more see Basics of Investing for Beginners.
• Make education more affordable: Subscribers decide how much they want to contribute to an RESP in any given year and which products they wish to invest in. Beneficiaries also have a wide range of schools to choose from both at home and abroad. If your child isn’t interested in attending a Canadian college or university, maybe a culinary school in France is a better fit? An RESP can be applied to almost any recognized training program worldwide. Find the full list of available options here.

How does an RESP work?

Once a subscriber has engaged a financial institution (or promoter) and set up the type of RESP (individual, family or group) that’s right for them, they may begin making contributions. The type of plan will dictate the beneficiary and, in the case of group plans, how much they must contribute each month.

• RESP eligibility

Anyone can open an RESP for a beneficiary — parents, grandparents or a family friend — the only stipulation is that the contributions don’t surpass the beneficiary’s lifetime RESP allowance of $50,000. You can even name yourself as the beneficiary, although if you are over age 17, you won’t be eligible for the CESG grant.

• RESP contribution limit

While there is no annual contribution limit attached to an RESP, remember that the 20% matching contribution from the CESG caps out when you contribute $2,500 each year per child. There is, however, a lifetime maximum contribution allowance for each child of $50,000.

• RESP withdrawal rules

There are two types of educational withdrawals that can be made from an RESP: Post-Secondary Education (PSE) withdrawals and Education Assistance Payment (EAP) withdrawals.

• Post-Secondary Education (PSE) withdrawals

This portion of the RESP consists of the contributions the subscriber has made over the years. PSE withdrawals are tax-free because the contributions would have been made with after-tax dollars. There is no limit on the amount of PSE funds that may be withdrawn by the beneficiary upon enrollment in a post-secondary institution.

• Education Assistance Payment (EAP) withdrawals

This portion of the RESP consists of the earnings made by the investments themselves, combined with any government grants accumulated over the years. These withdrawals can only be made by the beneficiary and are intended for education-related expenses. While this includes obvious items, such as tuition and books, it can also be used for other relevant items, such as a new laptop, transportation or food. For the first time in 25 years, the 2023 Federal Budget proposed an increase of EAP withdrawals. During the first 13 weeks of school, EAP withdrawals will be limited to $8,000 for full-time students and $4,000 for part-time students. There is no limit to the amount withdrawn after this period has passed, however EAPs are treated as taxable income in the hands of the student.

What happens to an RESP if it is not used?

If your child or beneficiary is not interested in pursuing a post-secondary education, there’s no need to panic. RESPs can generally stay open for 35 years following the year in which the plan was started, meaning you have plenty of time if the beneficiary changes their mind. If a post-secondary education is clearly not in the cards, you may qualify for a few other options:

• Naming a new beneficiary
• Transferring the funds to a Registered Retirement Savings Plan (RRSP)
• Transferring the funds to a Registered Disability Savings Plan (RDSP)

If you have to close the account, you will not be required to pay tax on the contributions you made over the years, but you will have to return any grants or other incentives you received from the government and pay tax on any investment earnings at your marginal rate, plus an additional 20% penalty.

What happens if there is money left over in an RESP?

Post-secondary education can be expensive, but there can be times when an RESP may have some money left over once school is all done. In those instances, when you wind down the account, any money left over in the account attributed to the CESG or the CLB will be returned to the government, while the remaining funds tied to contributions will be returned to the person who opened the account.

Any money earned from investing either your own contributions or government funds is money you may be able to hold on to — minus applicable income taxes — assuming you meet the following conditions:

• All beneficiaries named in the plan are at least 21 years old and not eligible for an Education Assistance Payment
• You are still a Canadian resident
• The RESP was opened at least 10 years ago

The investment income withdrawn from the RESP would be taxed at your regular income tax rate, plus an additional 20%. Alternatively, to avoid that tax hit, you could transfer up to $50,000 of the funds into your or your spouse’s RRSP and claim the RRSP deduction, provided there is sufficient contribution room.

Maximize your Canada Education Savings Grant

Every child under the age of 18 may qualify for up to $7,200 through the CESG, however, this grant is not made in a lump sum payment. Instead, the government contributes a maximum of $500 annually. If you can contribute $2,500 a year to your child’s RESP, you can maximize the CESG in a little over 14 years.

RESP vs. RRSP vs. TFSA

Here’s a look at how RESPs compare with some other popular registered accounts: