The Basics of RESPs

Happy Education Savings week! The topic of RESPs has been on my mind as I’ve just had my first child this summer and I’m currently looking into options to open an RESP account for my son. It’s best to start the RESP as early as possible in your child’s life to get the highest returns. Read on to find out why!

How is an RESP different from an RRSP? What are the advantages of each?

They both have tax advantages because they are registered accounts with CRA. An RRSP is a savings account for your retirement whereas an RESP is a savings account for resp3your child’s education. The main advantages of an RRSP are that your contributions are tax deductible from your income that year and the interest you earn is not taxed until it is withdrawn.

The advantages of an RESP are:

  1. The interest earned is not taxed until the funds are withdrawn. (Similar to RRSP)
  2. The withdrawals of earned income (interest, capital gains, grants) are taxed as the income of the student, which usually means they pay little or no tax because they have low or no other income.
  3. There are matching federal and provincial grants that are added to the RESP on top of the parents’ contributions.
  4. There are additional grants for children from low- to mid-income families.

What are the grants and how are they calculated?

Canada Education Savings Grant (CESG) – Federal

Basic Grant – 20% of annual contributions you make to a maximum grant of $500 (or an annual max of $1,000 in CESG if there is unused grant room from a previous year), up to a lifetime limit of $7,200.

Additional Grant – The additional grant money is based on your net family income. For 2016, the additional CESG rate on the first $500 contributed to an RESP is:

  • 40% (extra 20% on the first $500), if the child’s family has qualifying net income for the year of $45,282 or less; or
  • 30% (extra 10% on the first $500), if the child’s family has qualifying net income for the year that is more than $45,282 but is less than $90,563.

resp1The following chart gives you a brief overview of how the CESG is calculated depending on your family net income:

Canada education savings grant summary chart
Net family income for 2016 Family net income up to $45,282 Family net income between $45,283 and $90,563 Family net income of more than $90,563
CESG on the first $500 of annual RESP contribution 40% = $200 30% = $150 20% = $100
CESG on $501 to $2,500 of annual RESP contribution 20% = $400 20% = $400 20% = $400
Maximum yearly CESG depending on income and contributions $600 $550 $500
Lifetime maximum CESG for which you may qualify $7,200 $7,200 $7,200

Source: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/cesp-pcee/csg-eng.html

Canada Learning Bond (CLB)

The Canada Learning Bond is available to children:

If you qualify, you could receive up to $2,000 for your child’s RESP without having to put in any of your own money!

The money you get for your child could include:

  • $25 to help cover the cost of opening the RESP;
  • $500 to add to the RESP now, to help you start saving early; and
  • an extra $100 each year until the calendar year he or she turns 15, as long as you continue to receive the National Child Benefit Supplement.

Source: http://www.esdc.gc.ca/en/education_savings/clb.page

B.C. Training and Education Savings Grant (BCTESG) – Provincial

Quebec, Saskatchewan, and BC have provincial grant programs for RESPs.

To be eligible for the $1,200 available via the B.C. Training and Education Savings Grant the following criteria must be met:

  1. The child was born in 2006 or later
  2. You and the child must be residents of British Columbia
  3. The child is the beneficiary of a Registered Education Savings Plan (RESP) with a participating financial institution

You must request the grant between the ages of 6 and 9 for your child.

Grant application period for eligible children

Birth Year 1st day of eligibility 1st day to apply Last day to apply
2006 Child’s 6th birthday in 2012 August 15, 2016 August 14, 2019
2007 Child’s 6th birthday in 2013 August 15, 2015 August 14, 2018
2008 Child’s 6th birthday in 2014 August 15, 2015 August 14, 2018
2009 Child’s 6th birthday in 2015
from Jan 1, 2015 to Aug 15, 2015
August 15, 2015 August 14, 2018
Child’s 6th birthday after Aug 15, 2015 Day the child turned 6 Day before the child turns 9
2010 or later Child’s 6th birthday Day the child turns 6 Day before the child turns 9

Source: http://www2.gov.bc.ca/gov/content/education-training/k-12/support/bc-training-and-education-savings-grant 

When can the payments be made to the child?

The student must be enrolled in a qualifying educational program (including correspondence courses); or the student has attained the age of 16 years and is enrolled in a specified educational program.

What happens to the original contribution money?

The funds that have been contributed by the parents to the RESP account can be returned tax-free to the parents or given to the child beneficiary when they attend school. The withdrawal of the original contribution does not count as taxable income for either party.

Is there a maximum limit?

The lifetime limit on the amounts that can be contributed to all RESPs for a beneficiary is $50,000 (not including the grant money).

Why should I start an RESP account as early as possible in my child’s life?resp2

This is because of the principle of compound interest. For every year that you hold the savings account, the interest will be calculated and paid on the whole total, including last year’s interest. Even a small monthly contribution will build up over time.

Also, the grants available have annual maximum amounts so if you are able to make the maximum parental contributions every year from the 1st year of your child’s life, you will be taking full advantage of all the grant money that would possibly be available to your little one.

How do I set up an RESP account?

Your child must have a Social Insurance Number (SIN). RESPs are administered by banks and other financial institutions.

For more information see the following:

http://www.esdc.gc.ca/en/education_savings/index.page?

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html

Until next time, happy saving!

-Alicia Loewen, Coastal Tax

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