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What is an RESP?

January 24 2018 by Multi-Prêts Hypothèques
What you'll learn
  • Definition of an RESP

  • Government grants and tax breaks

  • Individual, collective or family plan

As the name says, the Registered Education Savings Plan is an investment program allowing the subscriber to set money aside so that a beneficiary can eventually use it to help pay for post-secondary studies. It can be used for university, college or professional studies.

Just like life insurance, which we discussed in a previous article, an RESP is an excellent way to ensure the financial safety of those who depend on us.

An RESP can be opened as soon as the beneficiary has a social insurance number, and contributions can reach a maximum of $50,000 per plan. However, a child can have more than one plan in their name.

Although you should consult a professional if you decide to go forward, here are the general guidelines on this method of saving. 

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Government subsidies

By providing considerable subsidies from both the provincial and federal governments, this investment vehicle is a highly interesting option to reduce a student’s eventual financial burden.

The Canada Education Savings Grant (CESG) represents 20% of the first $2500 invested each year. It cannot exceed $500 annually and $7200 in total per child. The grant is no longer allocated after the child’s 17th birthday.  

The Quebec Education Savings incentive (QESI) represents 10% of the first $2500 invested each year. It cannot exceed $500 annually and $3600 in total per child. Just like the CESG, the QESI is no longer allocated once the child reaches adulthood.

Both governments offer extra grants for families with low and middle incomes, but the lifetime maximum remains the same. 

Tax incentives

Unlike an RRSP, the contributed amounts cannot be deducted from your income tax and benefit return. However, your contributions will build up and generate tax-free revenue. When the beneficiary withdraws money to pay tuition fees, they will only be taxed on the portion stemming from government subsidies and generated revenue. Since students normally have relatively low tax rates, it can prove to be very worthwhile for tax purposes.

Distinguishing between the three types of plans: individual, collective and family

For an individual RESP, the subscriber is an individual or a couple and the sole beneficiary does not necessarily need to be related to them. For a family RESP, the subscriber, an individual or a couple, can name many beneficiaries who share a family bond (child, grandchild, brother or sister).

For an individual plan, the subscriber can name themselves as beneficiaries of their own plan. However, since they must be at least 18 years old to subscribe, they will not benefit from the governmental subsidies.

Collective RESPs pool together the contributions of a group of subscribers. It is considered less flexible since it often requires a commitment to invest a predetermined amount. Furthermore, should the child decide not to pursue post-secondary studies, the subsidies and returns could be redistributed to the other beneficiaries of the collective plan.

Certain collective contracts can allow the subscriber to transfer the RESP to another child. However, that can sometimes be done more easily in an individual plan, and without any problems in a family plan.   

Ask questions and shop around

Regardless of the type you choose, opening an RESP involves asking questions regarding set-up fees, administrative fees, minimum contributions, withdrawal conditions, transfer possibilities and any other conditions. As with any other form of savings, it’s best to shop around in order to find the program that best suits your needs.

To start saving now on your children’s school expenses, read our article, “Back to school without breaking the bank”.

Key takeaways
  • An RESP can be opened as soon as the beneficiary has a social insurance number, and contributions can reach a maximum of $50,000 per plan. However, a child can have more than one plan in their name.
  • There are three types of plans: individual, collective and family
  • By providing considerable subsidies from both the provincial and federal governments, this investment vehicle is a highly interesting option to reduce a student’s eventual financial burden. 
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