Back to School Tax Tip: Understand and Use the RESP

Did you know that dentistry, pharmacy, medicine and law are the professions with the highest undergraduate tuition fees in Canada, ranging from $10,000 to $18,000 per year? The average tuition fee for all faculties is just under $6,000 a year. With this in mind, most families could find it challenging to fund their family’s lifelong educational needs. The Registered Education Savings Plan (RESP) can help.

Contributions to an RESP are made with after-tax dollars. To clarify, just like the Tax Free Savings Account (TFSA), there is no tax deduction allowed when you invest money into an RESP. But the funds attract tax-deferred investment income. This will ultimately be tax-free if students pursue post-secondary education and withdraw the funds when they have little or no income.

There is actually no annual contribution limit, either, but savers should know that a lifetime maximum contribution of $50,000 can be made for potential students under the age of 31. Even if you win the lottery, however, it’s best not to contribute the $50,000 maximum in a lump sum.

The reason is sweet: the RESP contribution also attracts participation from the federal government by way of the Canada Education Savings Grant (CESG). For each beneficiary, this is 20% of up to $2,500 of the annual contribution. Therefore, the CESG can rise to a maximum grant of $500 per year, which also accumulates investment earnings on a tax-deferred basis. If there is unused grant room from a missed prior year, a CESG of up to $1,000 is possible in any given year, when contributions up to $5,000 are made in that year.

The maximum lifetime CESG is $7,200, and beneficiaries qualify for the grant until the end of the calendar year in which they turn 17. However, contributors must start saving in the RESP before the end of the calendar year in which the beneficiary turns 15 to be eligible for the grant.

A family RESP plan allows parents to name more than one beneficiary for someone related by blood or adoption, and under the age of 21. This age limit can be ignored when funds are transferred from one plan to another.

The CESG and its investment earnings would normally be withdrawn as Education Assistance Payments (EAPs). These amounts must be reported in income by the student for tax purposes, and because students often have little or no income, the EAPs are often tax-free or subject to very little tax cost.

The benefits of the RESP and the CESG make education planning an important conversation for year-end tax and investment planning. Leveraging the dollars the government is prepared to give to important life events, like saving for a child’s education, is an important opportunity. Tax and financial advisors and their clients will want to discuss their options now, when back to school time is top of mind.

Additional educational resources: The November CE Summits, to be held in Winnipeg, Calgary, Vancouver and Toronto Nov. 21 to 28, will discuss year-end tax planning. Also see EverGreen Explanatory Notes.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

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