RESP 101

A Registered Education Savings Plan (RESP) is a government-registered account that helps families save for a child's post-secondary education in Canada. Money contributed to the RESP can be invested, and investment income is generally sheltered from tax while it remains in the plan.

The RESP's main attraction is the combination of long-term investing and government education incentives. For eligible contributions, the federal Canada Education Savings Grant (CESG) can add 20% on the first $2,500 contributed each year, subject to the program's rules and available grant room.

Parents, grandparents, relatives and family friends can generally open an RESP for a child. The person who opens and contributes to the plan is called the subscriber; the child named in the plan is the beneficiary.

A child can be named as beneficiary of more than one RESP, but contributions across all RESPs for that beneficiary count toward the same lifetime contribution limit.

The beneficiary generally needs a valid Social Insurance Number (SIN) and must be resident in Canada for a contribution to be eligible for CESG.

RESP contributions are not tax-deductible.

There is no annual contribution limit for RESPs opened under the current rules, but the lifetime contribution limit is $50,000 per beneficiary.

The federal government provides education savings incentives through the Canada Education Savings Grant (CESG) and, for eligible low-income families, the Canada Learning Bond (CLB). Some provinces also have education savings incentives.

When a beneficiary enrolls in a qualifying post-secondary education or training program, RESP funds can be used to help pay for education-related costs. The government grants and investment earnings are generally paid as Educational Assistance Payments (EAPs).

EAPs are taxable income to the student in the year received. Because many students have relatively low taxable income, the tax may be modest or even nil depending on their overall circumstances.

If withdrawals occur from the RESP without proof of enrollment, it could trigger a repayment of taxable grants previously received.

Withdrawing only PSE (contributions) could be advantageous if the student has a higher taxable income and future years' income is expected to be lower. Knowing the student's employment situation is key to deciding when to take EAPs.

An RESP does not automatically become a problem if a child changes plans. There may be several options, depending on the plan, the beneficiary's circumstances and current tax rules.

Government grants generally have to be repaid to the government when they are not used for qualifying education purposes. There can also be tax consequences when investment income is withdrawn outside the intended RESP structure.

To make an RESP withdrawal, the subscriber must provide proof of enrollment of the beneficiary as either a part- or full-time student, in a qualifying post-secondary educational institution.

• There is no limit on the amount of PSE contributions that can be withdrawn.
• EAP withdrawals have an $8,000 limit during the first 13 weeks of schooling for full-time students. Once the 13 weeks have passed, any amount of EAP can be withdrawn.
• Limits differ for part-time students. They can withdraw up to $4,000 in EAPs for every 13-week period.

Proof of enrolment may include:

• •An offer letter or letter of acceptance
• •Course confirmation showing the student's name, student number, program, and term dates
• •Tuition statement showing student's name, student number and term

With some planning, you can make the most of the funds in your RESP and reduce the tax impact on withdrawals.

Many post-secondary institutions now offer online cost calculators that can help families estimate total first-year expenses, including tuition, housing, books, living costs, and personal expenses. These tools can provide a more realistic savings target than tuition alone and help identify potential funding gaps before a child starts school.