RESPs 101

Not only has the cost of college and university risen sharply, but so has the importance of graduating with a marketable skill and knowledge set, which increases the necessity of a post- secondary education. The cost of tuition, books, supplies, residence, and travel for a student in an undergraduate program at a Canadian public university is approximately $25,000 per year.

Although more in-depth analysis is usually required, the quick RESP facts are:

  • The Canada Education Savings Grant (CESG) will match 20% of RESP contributions up to a maximum of $500 per year per beneficiary and to a lifetime maximum of $7200 per beneficiary
    • An annual deposit of $2,500 earns the maximum CESG of $500
  • There is no minimum, or maximum, annual RESP contribution, but each beneficiary has a$50,000 lifetime contribution limit
  • Contributions grow and compound tax-free, like an RRSP, until they are withdrawn
  • The original contributions are treated as return-of-capital and are not taxed since thesecontributions did not reduce taxable income
  • Only the grants and earnings withdrawn as Education Assistance Payments (EAP), are taxed
  • Earnings and EAPs are taxed in the hands of the beneficiary (i.e., the student), and typically at a much lower tax rate or no tax, if the beneficiary’s income is low enough, the rest of a withdrawals is considered Return-of-Capital and is not subject to income tax
  • Returned capital and EAPs can be used for education-related expenses, including housing and transportation, when enrolled at any eligible domestic or foreign post-secondary institution or training program
  • A child can be designated as a “beneficiary” on more than one RESP
  • RESPs are opened for children by “subscribers”, and are typically parents, grandparents, aunts, and uncles

Passing wealth between generations to minimize student debt by opening and funding a RESP on behalf of your grandchildren is an excellent option.

The opportunity to set aside a useful inheritance directly to your grandchildren for the expressed purpose of education is extremely appealing for many.

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