A Registered Education Savings Plan — or RESP — is a tax-advantaged savings account for post-secondary education that has funding opportunities by the Canadian government through grants and eligible bonds. Anyone can open and contribute to an RESP (parents, grandparents, an aunt, or a parent’s friend).

There are three important entities involved in an RESP: 

Subscriber: The subscriber is the one who opens up an RESP and contributes to it.

Beneficiary: The beneficiary is the child who receives the contributions for the education plan and education-related expenses. Family plans can have multiple beneficiaries.

Promoter: A promoter is an organization that offers RESPs, such as a bank, credit union, or group scholarship provider.

There are three types of RESPs you could open:

Anyone can become a subscriber by setting up an individual RESP for a single beneficiary. Eligible beneficiaries can receive Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB).

The subscriber doesn’t have to be related to the beneficiary by blood or adoption, and they can follow a flexible payment schedule to make contributions to the RESP (until the plan hits its maximum lifetime contribution amount). 

Family RESP can have one or more beneficiaries, but they need to be related to the subscriber by blood or adoption (such as a stepchild, brother, or grandchild). The subscriber can self-direct the payment plan and make payments as desired.

 For a family plan shared by siblings, the contributions and grants can be shared between them, too. For example, if one child doesn’t use their entire portion of the RESP, the funds can be used for the other sibling’s education. While the CESG grant can be shared with siblings, each beneficiary is entitled to a maximum CESG of $7,200.

Like the individual RESP, a group RESP can be set up for only one child, who may or may not be related to you. Group plans tend to have more rules and restrictions than others. The payment schedule tends to be fixed, and there are penalties for missed payments. Your contributions go to a shared pool of earnings along with other investors who have children of the same age in school that year. The funds are usually invested in low-risk investments selected by the group scholarship provider.

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Grant funds may be returned. The funds are to be used for the beneficiary’s education. If the child decides not to pursue post-secondary education or the subscriber needs to withdraw the money for any other reason, any grant money is to be returned to the government.

Taxes and penalties. If interest/earnings in the RESP is not used by the beneficiary through an EAP, accumulated interest can be paid out on its own. This is called an Accumulated Income Payment (AIP) and is usually paid to the subscriber. It is taxed at the regular income tax rate of the subscriber, plus an additional 20%.

Although RESPs provide several benefits when saving for education, it has certain limitations:

Regardless of a family’s income, no child can collect more than the maximum lifetime limit of $7,200 from the CESG.

There is a lifetime contribution limit of $50,000 per beneficiary. Over-contributing to an RESP incurs a 1% monthly taxes, and the excess must be withdrawn to avoid them.

If the subscriber of RESP dies without a will instructing where the funds should go, the RESP contributions would belong to the deceased subscriber of the RESP, meaning that the court will decide what happens with the RESP money. In such cases, there is a risk that the RESP money might not make it to the beneficiary.

While the RESP can remain open for 36 years before it needs to be used, if the beneficiary decides to not pursue post-secondary education at all, they have the following options:

The Canadian government matches 20% of your contribution in an RESP up to $2,500 per year through the CESG. This means that if you contribute $2,500 in a year, you can receive $500 for the year. Eligible beneficiaries can also receive additional CESG and the Canada Learning Bond.

To maximize the RESP grant, contribute $2,500 per year, per child (beneficiary) for 14 years. Then top it off with an extra $1,000 in the 15th year to receive the maximum CESG of $7,200 per beneficiary. You can also receive an additional $500 per year in CESG if you missed the previous year’s set of grants.

In the event you accidentally over-contribute and need to reduce the balance back to $50,000 to prevent tax penalties, you can transfer it into a Tax-Free Savings Account (TFSA) to later use for the child’s education or life expenses.

There are many rules specific to the withdrawal of RESP money. Here are the basics of what you should know before you attempt to take money out of your RESP:

Only the subscriber (person who set up the account and made contributions) can make withdrawals. Withdrawals of contributions made by the subscriber are called Post-Secondary Education Payments (PSE). They may be sent to either the subscriber or beneficiary. Withdrawals of the government grants/bond portion can only be sent to the beneficiary in EAPs. The subscriber must provide the student’s proof of enrollment in a program before being able to access funds.

PSE payments aren’t taxable.

When the beneficiary qualifies to receive the RESP money, the money can be withdrawn as an EAP. An EAP consists of the earnings on the contribution amount and the grant money. The tax is payable on the portion of EAP withdrawals. The financial institution that holds the RESP will issue a T4A tax form in the student’s name for EAP payments.

For students enrolled in a full-time program, there is an $8,000 EAP limit (or $4,000 for part-time programs) during the first 13 weeks of admission to an educational institution. After the student has been enrolled in the educational institution for 13 weeks, any amount of EAP can be withdrawn. There is no limit on the amount of PSE that the subscriber can withdraw.

TFSAs and RESPs are both tax-advantaged savings accounts, they have their own benefits and drawbacks, depending on your situation. A TFSA may not provide as many government benefits as the RESP, but since taking money out of it has fewer restrictions and no tax consequences, it’s much more flexible. And while the earnings made inside the RESP account, aren’t taxed until they are withdrawn, an RESP’s earnings can only be used for educational purposes. It doesn’t have the flexible spending possibilities that a TFSA has.

 The EAP amount withdrawn from an RESP is subject to taxes in the hands of the beneficiary. RESPs are also treated differently than TFSAs when it comes to estate planning. An individual can name beneficiaries for their TFSA but not for their RESP. Ideally, you should add another subscriber to the RESP who can take over the account in case of your passing.

TFSAs are great for savings goals since the money you withdraw isn’t subjected to taxes, while RESPs are great resources for young people starting off in their education and their financial journey.

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