What is a Registered Education Savings Plan (RESP)?
A RESP is an Education Investment Plan that allows
you, as the subscriber, to accumulate money in an
investment portfolio for your beneficiary's (usually
child's), post-secondary education. The withdrawals
can be used towards you beneficiary's tuition, books
and living expenses.
Two significant tax benefits come about because
of the tax treatment of a RESP. They are:
A RESP allows contributions to grow by compounding
in a tax-sheltered environment until withdrawn.
Since the withdrawals are made in the name
of your beneficiary, and spread out over
a number of years, your lower income beneficiary
pays little, if any, income tax.
When the student begins to use the RESP for education
purposes, the investment income from that vehicle
becomes taxable in their hands.
However, because the student typically has little
other income, or is taxed at a very low tax rate,
he or she effectively pays little or no tax on the
Why an RESP?
Higher education is quickly becoming a high price
necessity for a child's future success. According
to the Canadian Federation of Students, the current
cost for one year of an undergraduate program, including
living expenses, is about $10,000. By the time a
child, born this year, reaches the age of 18, that
one year of study will rise significantly in cost.
Estimates in Head Start, a new book by Gordon
Pape and Frank Jones, shows that in 15 to 20 years
students may well need $100,000 to $150,000 just
to complete a basic four year undergraduate degree.
Parents and grandparents want what is best for their
children's/ grandchildren's futures. They, however,
may not be fully prepared for the future cost of
post-secondary education for that child.
Just as an individual would save for retirement,
contributing to a child's RESP is an excellent way
to save for that post-secondary education.
The maximum amount that can be contributed for any
beneficiary is $4,000 per year, up to a lifetime
limit of $42,000 per beneficiary. This maximum applies
to each beneficiary and not to each subscriber who
contributes to the plan. So, for example, if a parent
and a grandparent each wanted to set up a RESP for
their child/grandchild, the combined contribution
of both subscribers, in any given year, cannot exceed
$4,000 and the lifetime limit cannot exceed $42,000.
The Canada Education Savings Grant (CESG)
Effective January 1, 1998, the government will provide
a Canada Education Savings Grant that gives parents
and others even greater incentive to save through
the use of a RESP. The grant provided by the government
will be equal to 20% of contributions made to a
RESP plan, on the first $2,000 in annual contribution
for each child up to the age of 18. The maximum
annual grant will be $400 per child. A family that
has been unable to make contributions for one or
more years may catch up in later years. In this
case, the CESG will be paid on contributions up
to $4,000 per year. The maximum lifetime grant per
beneficiary is $7,200 (20% x $2,000 x 18 years).
The Canada Education Savings Grant will be given
directly to the RESP promoter chosen by the subscriber,
to be invested in the beneficiary's plan. The grant
itself is not included in calculating the annual
and lifetime RESP contribution limits.
The introduction of the Canada Education Savings
Grant means that investments in a RESP will automatically
receive a 20% rate of return on all contributions
up to the first $2,000 per year. This automatic
20% rate of return, provided in the form of a grant
by the government, makes RESPs a very attractive
savings vehicle for your child's education.
The CESG and the investment income it generates
will be paid to the student while he or she is enrolled
in eligible full-time, post-secondary education
or training programs. If the child does not pursue
education or training, the grant must be returned
to the government. The investment income can be
transferred to the subscriber's RRSP under certain