What is RESP?

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A Registered Education Savings Plan (RESP) is a tax-sheltered investment account that can be set up to fund a child’s post-secondary education. It is a type of Registered Savings Plan (RSP) that allows you to invest and earn interest tax-free while also receiving contributions from the government. When the beneficiary enrolls in a recognized post-secondary institution such as a university, college, or trade school, they can retrieve the funds from the RESP to pay for their education.

An RESP will involve 3 parties:

• The beneficiary: This person receives the funds to help pay for their higher education.

• The subscriber: This is the sponsor(s) who funds the RESP. This is often the beneficiary's family member but can be an outside party.

• The RESP Promoter or Provider: This is the financial institution that holds the RESP, helps invest it, and eventually releases it.

Read below to find out about opening, contributing to and withdrawing from an RESP account.

The subscriber, such as a parent, grandparent or relative, can open an RESP for a child. Adults can also open an RESP account for themselves. However, it is best to open and start contributing to the plan when the beneficiary is under 18 years of age, as they would qualify for different grants from the federal government and the province.

There are two main requirements for designating someone as a beneficiary of the RESP Account:

• The individual is a Canadian citizen or permanent resident, and
• The individual must have a Social Insurance Number (SIN).

A subscriber can open three types of RESPs:

Multiple RESP Accounts: There is no limit to the number of RESP accounts a beneficiary can have or to the number of RESP accounts a subscriber can open for a beneficiary. However, the lifetime contribution limit of $50,000 is per beneficiary, meaning the total contributions to all the accounts of a single beneficiary cannot exceed $50,000. Meanwhile, government grants are also provided per beneficiary.

Maximum RESP Term: An RESP account can remain open for 35 years. This allows freedom for the beneficiary to attend university when they feel ready to.

While the RESP account can remain open for up to 35 years, you can contribute to it for up to 31 years.

You must take the following into account:

• RESP Contribution Limit: The RESP has a lifetime contribution room of $50,000, and there is no annual contribution limit in the plan.

• Excess Contributions: Excess contributions are subject to a 1% tax per month on the excess amount contributed.

• CESG: Each year, the government will pay 20% of the first $2,500 of your contributions (up to $500) as CESG (Canada Education Savings Grant) into the RESP account. The CESG has a lifetime grant limit of $7,200.

• CLB: CLB (Canada Learning Bonds) are another government incentive. You can get $500 in the first year and $100 each year up to age 15 until you reach the lifetime limit of $2,000.

While the money is within the RESP, you will have several options for investing it. You can allocate it into mutual funds, ETFs, GICs, stocks, bonds, or a combination of the above, and any capital gains which you make will not be taxed. The investments can be self-directed, but many financial institutions will also invest it for you at a low cost. How you choose to invest your money will depend on your risk tolerance as well as the approximate time until withdrawal.

Now, it is time to reap the benefits of your foresight and confidently withdraw from your RESP account. However, there are some RESP withdrawal rules that must be followed. There are three types of withdrawals:

1. Withdrawal of Contributions: This is the repayment of the subscriber's contributions and excludes any government grants or investment gains. These contributions can be withdrawn tax-free, and the subscriber can choose to give this amount to the beneficiary. When these contributions are withdrawn for the beneficiary’s education, most promoters call the withdrawals Post-Secondary Education (PSE). There is no limit to the withdrawal of contributions up to the amount contributed. The subscriber can even retrieve these funds whenever they need to, such as in case of an emergency.

2. Educational Assistance Payments (EAPs): These refer to the withdrawal of government grants and investment earnings in the RESP for the beneficiary’s education. These withdrawals will be considered the beneficiary’s taxable income, and the beneficiary will have to pay taxes on them. The EAP withdrawal limit for the first 13 consecutive weeks of enrollment is $8,000 for full-time students and $4,000 for part-time students. After the first 13 weeks, any amount can be withdrawn by full-time students, but the limit of $4,000 for a 13-week period continues for part-time students.

3. Accumulated Income Payment (AIP): Any interest earned in the RESP that is not withdrawn by the beneficiary through the EAP may be paid to the subscriber. The withdrawal will be subject to regular income tax along with an additional 20% (or 12% for Quebec residents). To be able to withdraw AIP, the RESP account must have been open for at least 10 years, and the beneficiary must have reached the age of 21 and is not eligible to receive EAP at the time of withdrawal.

It might be best to withdraw from the RESP when the beneficiary does not hold a job. This is to minimize potential taxation on capital gains made in the RESP account.

Using Funds Withdrawn from RESP: RESP funds can be used for the following purposes -

• Paying university or college tuition or apprenticeship programs
• Living expenses such as boarding, food and bills
• Transportation costs
• Textbooks, stationery and other tools, such as laptops

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RESP contributions are not tax-deductible. However, they continue to grow tax-free while in the RESP account. Any amount other than the original contributions, such as money accumulated through investment interest and government grants, are classified as educational assistance payments (EAP) and will be taxable at withdrawal. When the investment gains and the government grants are withdrawn, they are considered taxable income belonging to the beneficiary. The EAPs must be claimed on the beneficiary’s tax return. Because the beneficiary is a student and probably not earning other income, their overall income is often low enough that little or no tax will be paid on the withdrawals.

This makes the RESP a very powerful financial tool that can be leveraged to plan wisely for you and your child's future. To calculate approximately how much money an RESP account can save, visit our RESP calculator.

If your child refuses to go to a post-secondary institution such as a college, university, or trade school, you can retrieve the funds from the plan. You can withdraw all your original contributions from the RESP tax-free and in the form of withdrawal of contributions and return all CESG or CLB money to the government. Your capital gains, interest, or dividend payments from investments are paid out to you as Accumulated Income Payment (AIP). The RESP earnings can also be transferred to your RRSP (Registered Retirement Savings Plan) if the subscriber has enough contribution room, with the maximum limit being $50,000.

If using a family plan, the money can be transferred to another child’s plan, provided their contribution hasn’t been maxed out up to the $50,000 limit. Also, bear in mind that each child cannot access CESG above $7,200. Each child’s plan, including contributions and grants, is managed separately within the family plan.

The Canada Education Savings Grant program adds up to 20% of your annual contribution to the RESP. The government provides a yearly limit of $500, meaning you should aim to deposit $2,500 into the RESP every year to receive the full CESG amount for that year.

The government can provide additional CESG depending on family income. For 2023, families with an income of $53,359 or less could get an extra 20% pay-out from the government on the first $500 contributed, which means up to an additional $100. Meanwhile, families with an income between $53,359 and $106,717 could get an extra 10% on the first $500 contributed, i.e. up to an additional $50.

Families of all incomes have a lifetime grant limit total of $7,200 for one child. Bear in mind that the exact family income brackets are revised annually depending on inflation and other adjustment factors. One restriction of the CESG is that the beneficiary must be under 18 to receive it. Thus, it is best to start investing in an RESP early to reach the maximum allowable amount of $7,200.

Canada Learning Bonds are another government incentive for investment into RESP accounts, specifically directed towards encouraging lower-income families to begin investing in RESPs. The requirement to receive CLB is that the child must be born on or after January 1, 2004. CLB deposits $500 in the eligible child’s RESP for the first year, followed by an additional $100 every year after for up to age 15 until the limit of $2,000 is reached.

The income threshold to qualify for CLB depends on the number of children in the family. For the period of July 1, 2023, to June 30, 2024, a family with one to three children qualifies if their annual income is less than or equal to $53,359. Note that the thresholds may be typically revised annually.

A unique aspect of Canada Learning Bonds is that they are retroactive. This means that eligible individuals over 18 years of age can apply for CLBs themselves and receive money retroactively for however many years their family has qualified, once again up to $2,000. They can apply up until age 21.

In addition to the benefits provided by the federal government, two provincial governments offer their own incentives for residents of those provinces to invest in an RESP.

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RESP Providers
Embark
Wealthsimple RESP
TD RESP
Questrade RESP
RBC RESP
Scotiabank RESP

There are numerous RESP promoters in Canada, including major banks. There are different fees associated with managing an RESP, which differ from bank to bank. Before signing a contract with any one bank, you should take a look at what other banks are offering, as well as reviews of these different RESP accounts online, to make the best decision. On the right are some popular financial institutions which you can begin an RESP with. You can also find other brokerages that offer RESPs in our list of the best trading platforms in Canada.