The RESP (Registered Education Savings Plan) is an investment plan intended to help you build an education fund for a child. When the child goes to college or university, the goal is for the RESP to provide the funds to help cover the education’s expense.
A significant benefit of the RESP is the Canada Education Savings Grant program (CESG). Under the Canada Education Savings Grant program, the federal government will provide a direct grant to an RESP of 20% of the first $2,500 of annual contributions made to the RESP in a year.
The grant will be worth up to $500 per year for each year the beneficiary is under 18, to a maximum of $7,200 per beneficiary.
If the maximum contribution is not made in a year, entitlement to the grant can be carried forward to a later year (certain rules apply). The total CESG per beneficiary per year is capped at $1,000 or 20% of the unused CESG room, whichever is less.
To note, if the child chooses to not pursue post-secondary education, you will have to repay the principal portion of the CESG funds. There is further tax planning as well to consider.
Another benefit of the RESP plan is that it allows you to earn investment income in a tax-deferred environment, meaning the income in the plan grows tax-free. When the child withdraws the funds for education, the income portion will be taxable to the child. However, as it is common for students to not have much income, as well as combined with the tuition tax credit, the child may very well end up paying little or no tax on the income.
In summary, if planned for properly, $7,200 in grants can be issued to each child to help pay for their post-secondary education. Therefore, if one of your goals is to setup your child for post-secondary education, it would be valuable to position yourself to receive the grant.
Disclaimer – The information contained in this article is for information purposes only. It does not provide legal or accounting advise and it should not be relied upon. All tax situations are unique to their facts and will differ from the situations in this article.