RESP – Registered Educational Savings Plan

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The RESP (Registered Education Savings Plan) is a method of saving for post-secondary education.

The Canadian Federal Government gives the advantage of tax sheltered growth of income in the RESP until it is used by a Qualified Student when s/he is usually in a low tax bracket. Students who typically have little or no income can also use offsetting deductions which include a personal tax exemption, tuition fees deduction, and a deduction based on the length of their studies.

The other major advantage of a RESP is that a certain amount of contributions to a Plan are eligible for the Canada Education Savings Grant (CESG).

The CESG is available for up to $7,200 from the government for each child. Almost all financial advisors and other authorities involved with financial planning recommend that a family invest for post-secondary education through RESPs.

RESP Facts:

A contribution period within 31 years can be chosen.

The duration of a Plan can be for up to 35 Years from Application Year.

Before 2007 yearly contributions was up to $4,000 per child to a lifetime maximum of $42,000.

From 2007 there is no more limit to yearly contributions and a lifetime maximum has been increased from $42,000 to $50,000.

There is no age limit for being nominated for the benefits of a RESP.

Recognized universities, colleges, trade schools, technical institutes in Canada as well as outside of Canada are acceptable for Qualified Student studies. Generally, a 3 or 13 week course or longer qualifies for education funds.

CESG:

In 1998 the Federal Government introduced the Canada Education Savings Grant. Families, who invested in RESPs for education, were eligible to get 20% added to their yearly contributions. From 2007 the amount of yearly contributions, eligible for 20% addition, it’s been increased from $2,000 to $2,500. The CESG maximum is $7,200 per child through the life of the plan.

A feature that is not very well known by “would be” RESP contributors is “Carry Forward Room”.

If a child was living in Canada he began to accumulate contribution room whether or not he had a RESP. This means that unused grant for each year is potentially $400 for $2,000 (from 2007 – $2,500) contribution and can be used in future years. The maximum CESG that can be received in one year from 2007 is $1,000 because of the $5,000 contribution limit. Parents with children of age 15 and a few years younger should especially maximize on this feature by maximizing their RESP contributions.

RESPs in existence for children at ages 16 and 17, require certain conditions to be met in order to receive the CESG for their RESP. The government conditions are: that in the year that a child turns 16 or at any time before, RESP for the child must have either contain a minimum of $2,000 (and not withdrawn) or $100 invested in any 4 years (and not withdrawn).

What if I have young children?

The effects of compounding interest will certainly help families planning and contributing early. Future education costs require early continued investing to meet costs that may exceed $100,000 at the time that young children are ready to be University or College students.

Education Costs:

There are regional differences across Canada as some provinces regulate tuition fees with moderate or low indexed increases, however, education costs in professions such as Law and Medicine and for other courses for which Tuition Fees have been deregulated – costs can easily double the average.

Annual Education Costs and Expenses
Tuition (University of Toronto, 2019) 1 $8,253
Compulsory Fees1
(student health services, athletics and recreation, student association and other fees that apply to full-time Canadian students)		 $695
Books and other reading materials2 $871
Supplies2 $120
Accommodations (University of Toronto, 2019)3
Double room with meal $11,220 – $16,311
Single room with meal $13,878 – $19,052
Apartment style $5,706 – $10,143
Groceries/Meals2 $2,076
Public Transportation2
(Drives to school: include car payments, insurance, maintenance, parking)		 $828
Miscellaneous2
(personal and health care, clothing, household items, etc.)		 $2,184
  1. Maclean’s Guide to Canadian Universities 2019: “University tuition fees”, The Daily, Statistic Canada Web site, Oct. 9, 2008. “The Education Cost Calculator”, CanLearn Website www.canlearn.ca.
  2. Canada Student Loans Program Directorate, Human Resources and Skills Development Canada, Oct. 17, 2008.
  3. “Living in Residence”, Maclean’s Guide to Canadian Universities 2009: pg. 32-34. And 2019.

Would you be ready to cover the real cost of education?

Visit the federal government “Can Learn” Web-site mentioned above to calculate your own student’s potential costs today.

Yes, a RESP is a good idea, but which one?

The text below was taken from the brochure “What is an RESP” published by Ontario Securities Commission. This information created to help consumers to understand the different types of RESPs and to be aware of important considerations in order to find the suitable RESP.

The following three paragraphs offer a review of the OSC Brochure information. Some examples have additional information. The review contains opinions of the reviewer. The reader is advised to visit the OSC website for their information (below you will find the link to OSC website).

1) Self Directed RESP Accounts:

The Plans usually have no restrictions other than the government guidelines. Investments are composed of selections made by the investor and can range from lower return but secure investments, stocks and/or mutual funds that can have elements of risk associated with them or a mixture of both.

For Self-directed RESPs based on fluctuating stock or fund values, it is imperative that an advisor’s time and/or the dedicated time of the investor is taken to review and balance risk, returns, and timing for use of funds.

Going the secure route in a Self-directed RESP usually means that the limitation of $5,000 maximum annual contributions and the limited time horizon for longer term investing as funds are required means that larger scale investing advantages cannot be maximized by a sole investor.

Self Directed RESPs maybe as simple as a bank account or GIC which has deposits guaranteed but may not provide a sufficient return for accumulations necessary at the time of education.

Mutual funds or Stocks may experience fluctuations that would be difficult for investors to be pleased with year after year. Changes from one fund to another may be costly and timing for the withdrawal of education funds when needed is an issue that requires careful monitoring by an investor.

Self-directed RESPs are for investors who wish to take their own route and have many choices of investing available and will be able to live with their decisions.

2) Pooled Group Scholarship Trust Plans:

Group refers to all investors sharing in the investments on the basis of pooling funds together and having the amount of investment that is available for a student determined by that student’s education qualification and completion. Failure means forfeiture of income which goes to the Group of students who meet the requirements.

Restrictions exist on changing beneficiaries and there is no RRSP rollover when scholarship payments have started. An investor in a Group scholarship plan is at risk of getting no return on their investment.

There can be problems for Plan holders belonging to a Group scholarship plan if they are unable to continue paying for their Plan which can involve loss and forced discontinuation.

Costs are front end loaded and early withdrawal can mean a loss of some contributions. There is the reward of partial enrolment fee return if education is partially completed and complete enrolment fee return if the Qualified Student advances to the required 4th year course.

The investments are regulated by Canadian Securities Administrators and are for the most part are in federal and provincial Government bonds providing the benefit of security. There is Professional investment management that uses longer term and large-scale investing advantages which usually means a higher return for individuals than if they invested elsewhere with the same safety.

Pooled Group Scholarship Plans have restrictions although most offer a change to some form of Non-Group Status as an opting out provision. The change offered is at the cost of forfeiture of enrolment fee return which can mean thousands of dollars. Some companies also have a higher management fee that is imposed for those plans of subscribers who required the change. The higher management fee of 0.5% to 1% more can mean thousands of dollars to plans that have accumulated education fund and are ready to pay out.

Restrictions that belong to Group Scholarship Plans make them a gamble but if Subscribers are sure that their children will complete a 4 year education course without excessive interruptions or repetition of course study years then they should take advantage of gaining the forfeitures of the unfortunate subscribers and nominated Students who lost all or part of their income.

3) Pooled Individual Trust Plans:

Plans with a Scholarship Plan Dealer where contributions are pooled under Professional Investment Management on a large scale for longer terms and higher returns than if invested individually elsewhere with the same safety.

Unlike Group Plans the individual accounts are independent of any other subscribers so that payments to the plans can be individually adjusted without meeting Group obligations of deposit continuation.

Every Qualified Student may use the education funds for their particular circumstances for their education. Flexibility exists to stop or start education or for the change of beneficiary (nominee) which can be exercised for different reasons within the 35 years. There are no additional rules other than the government requirements for RESPs.

There are no forfeitures to other students. The option to change beneficiaries is unrestricted and always available. The choice to use income for a RRSP rollover for a subscriber’s own or spousal RRSP is available at all times if there is no education pursued or continued by a student.

Investments are regulated by the Canadian Securities Administrators and for the most part are invested in provincial and federal government bonds providing the benefit of security.
The sales fees are front end loaded and loss of deposits may occur if Plans are terminated early.

A Pooled Individual Trust Plan has flexibility without restrictions and worry free investing with predictable results.

The latest brochure from Ontario Securities Commission you can find here www.osc.gov.on.ca/en/Investors_res_resp.htm#story3.

Government provides a great support to families who open RESP account.

1. CESG

In 1998 the Federal Government introduced Canada Education Savings Grant (CESG) for the families, who want to save money for their children’s education.

Families, who invested in RESP, were eligible to get 20% ($400) on $2,000 of contribution.

From 2007 families, who invested in RESP are eligible up to 40%(depending on the income) addition on the first $500 of contribution.

  • In 2019 maximum Grant for families with yearly income $47,630 and lower is $600 per year (first $500, invested in RESP, will get you Grant equal 40% of invested amount ($200). Next $2,000 will get 20% (or$400) as it was before.
  • Maximum Grant for families with yearly income from $47,630 to $95,259 is $550 per year (first $500, invested in RESP, will get you Grant equal 30% of invested amount ($150). Next $2,000 will add 20% (or $400) as usually.
  • There is no changes for families with yearly income of $95,259 and higher. They are still eligible for 20% Grant on the first $2,500, invested in RESP during the current calendar year.

2. Canada Learning Bond (CLB)

Children, who were born after December 31, 2003 are eligible for up to $2,000, allocated by Federal Government.

  • All allocated amount is going to RESP.
  • Only families with low income (less than $47,630 per year) are eligible for CLB, i.e. families, qualified for National Child Benefit (NCB)
  • Here is how it works:
    • If your family’s yearly income is less than $47,630 (self-employed should consider their net income) the government transfers $500 for every newborn child on a new RESP, opened at his/her name. Thereafter, until the child’s 15th birthday, $100 is transferred to this RESP each year, when family’s income is less than $47,630. Maximum you can get is $2,000.
    • If your family’s yearly income greater than $47,630, you are not eligible for $500 at a birth of a child. But, in future, if your income became lower than $47,630, government will transfer $500 to your RESP and you will be eligible for $100 (per year) instalments as long as your income remains in that range.

The value of the RESP changes if you do contribution in 2019 year

$500 RESP contribution per year

Family income Annual grants
Before		 Annual grants
In new budget
$47,630 or less $100 $300 ($200 grant plus $100 CLB*)
$47,630 to $95,259 $100 $150
$95,259 and over $100 $100
* CLB – Canada Learning Bond

$1,000 RESP contribution per year

Family income Annual grants
Before		 Annual grants
In new budget
$47,630 or less $200 $400 ($300 grant plus $100 CLB)
$47,630 to $95,259 $200 $250
$95,259 and over $200 $200

$2,000 RESP contribution per year

Family income Annual grants
Before		 Annual grants
In new budget
$47,630 or less $400 $600 ($500 grant plus $100 CLB)
$47,630 to $95,259 $400 $450
$95,259 and over $400 $400

Income ranges are correct for 2019 year and may change depending on inflation in subsequent years.

The table was created by author using government website http://www.canlearn.ca/eng/savings/a-cesg.shtml.

To view Report prepared in 2008 for Human Resources and Social Development Canada By Informetrica Limited click here.