The Registered Education Savings Plan rules can be very confusing.
Here are the official RESP rules. However, government web pages are not user friendly and information is difficult to find. This post will help you get the information you need all in one place!
How much can you contribute?
The rules are more complicated than you might think. That said, the general rule is $2,500 per beneficiary per year.
This amount ($2,500) is eligible for the maximum Canada Education Savings Grant (CESG). The government will give you a 20% grant for every dollar you contribute to a maximum $500 per year. Therefore, if you contribute $2,500 in any year the grant will be $500 for a total of $3,000.
The maximum CESG is $7,200 per beneficiary. As a result, to maximize the CESG you will need to contribute $36,000 to capture the full $7,200 grant. However, only a $500 grant will apply every year, except if you missed previous years (see next section for details).
For 2007 and later years, there is no annual RESP contribution limit. However, the lifetime RESP contribution limit is $50,000 per beneficiary. The CESG and other provincial assistance programs do not count towards the lifetime limit.
A subscriber (usually a parent or guardian) can contribute on behalf of a beneficiary who is under 31 year of age at the time of contribution.
There are different limits on the amounts that can be contributed to all RESPs.
For each beneficiary, the annual limit is:
- for 1996 is $2,000
- for 1997 to 2006 is $4,000
- for 2007 and subsequent years, there is no limit
For each beneficiary, the lifetime limit is:
- for 1996 to 2006 is $42,000
- for 2007 and subsequent years is $50,000
I missed out on previous years, what should I do?
If you started an RESP late, or did not maximize your grants, not to worry, you can catch up in future years. In this case, the grant is capped at $1,000 per year. In other words, you can only catch up on missed grants one year at a time.
For example, if you didn’t contribute last year and wanted to catch up you will need to contribute $5,000 this year. As a result, you will receive a $1,000 grant. To be clear, if you contributed $7,500 this year you would only get the maximum $1,000 grant, and the remaining $500 grant would apply to next year.
The maximum annual CESG grant is $1,000.
Are all RESP plans the same?
There are two types of RESP plans:
- Pooled or Group RESPs, and
- Self-Directed RESPs
What’s the difference?
Well, to put in simple terms, Pooled or Group plans tend to have a bunch of rules and regulations in terms of maintaining contributions, withdrawals, eligibility and penalties. All these rules are unique to the Pooled or Group plan. On the other hand, self-directed RESPs do not have any of these restrictions, other than the universal RESP rules.
Generally speaking, avoid Pooled or Group RESP plans, unless you like complexity!
What about Individual and Family RESPs?
To be honest, there are not many differences between the two. The only difference is the beneficiary. An individual RESP can only have one beneficiary. You can open as many plans as you like. But if you have more than one child a Family RESP is the best option because you will limit the amount of work required.
What are the withdrawal rules?
This is where the rubber hits the road. You have saved and invested wisely, not it’s time to withdraw money from your RESP.
How does it work?
First, the RESP beneficiary must attend a qualified post-secondary education program determined by the federal government. Proof of enrollment is required. The definition of a qualifying post-secondary education is broad. In the end, the education program must provide a “Verification of Enrollment Form“.
Starting in 2007 the rules permitted part-time studies to count for RESP withdrawals.
Important RESP Terminology
- Post Secondary Education Payments (PSE)
- includes subscriber contributions
- non-taxable (tax has already been paid)
- no limits
- Educational Assistance Payments (EAP)
- includes CESG grants and growth
- taxable to beneficiary (T4A tax form)
- $5,000 withdrawal limit in the first 13 weeks of schooling
To emphasize, EAP withdrawals always come first. From a tax perspective, it is a good idea to withdrawal the taxable EAP payments first. Once the EAP (grants and growth) are exhausted, then withdraw the tax free PSE. Otherwise, you could end up paying back CESG grants to the federal government.
What happens if my child does not go to school?
The following steps outline what to do in this case:
- Keep the RESP open. The RESP can stay open for 36 years.
- Transfer the money to a sibling, but limits apply. For example, excess CESG grants will have to be repaid.
- All contributions can go back to the contributor tax free.
- All CESG grants will have to be repaid if the beneficiary does not attend a qualifying post-secondary education program.
- Transfer investment growth to your RRSP to avoid paying tax assuming you have room. If not, tax will apply at your marginal rate plus an additional 20% tax. Ouch!
What are non-educational withdrawals?
If you withdraw some of your RESP contributions for non-educational purposes AND there is no beneficiary of the plan eligible to receive an EAP, any CESG grant received based on the contributions will need to be repaid to the federal government. The RESP trustee will make the CESG repayment on your behalf. Non-educational withdrawals are NOT taxable.
Conclusion
Registered Education Savings Plans are a valuable tool to help provide a post secondary education to your children. Planning early is important, but you can get started anytime. When it comes time to withdraw money from an RESP, remember to take out Educational Assistance Payments (EAP) first. This will hopefully avoid paying back any CESG grants to the federal government.
Don’t pass up the opportunity to start a financial plan, if you don’t already have one.
Disclaimer: The content on this webpage is intended for informational and educational purposes only. No content on this webpage is intended as financial advice. The publisher of this website does not take any responsibility for possible financial consequences of any persons using the information in this educational content.
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