Raising a child can be expensive, especially if you have to pay for your child’s post-secondary education. Fortunately, the Canada Revenue Agency offers a range of incentives to encourage parents to save for their children’s future. If you have just become a parent, here’s what you need to know.
Registered Education Savings Plan (RESP)
You can use Registered Education Savings Plans to help save money for your child’s college education. The money you contribute to an RESP is not tax deductible. Similarly, when your child withdraws from his RESP, he will not be required to pay tax on any withdrawals tied to your contributions.
The money earned on these accounts — called Education Assistance Payments — is taxable. However, it is useful to remember that most college-age students are in lower tax brackets than their parents. Therefore, it is often a better option to have your child pay the tax for EAPs.
Canada Education Savings Grants (CESG)
If you set up an RESP for your child, Employment and Social Development Canada ( ESDC) will match 20 percent of the contributions you make through the Canada Education Savings Grant.
As of 2019, there is a lifetime limit of $7,200 and an annual limit of $500 CESG per year. If you have unused CESG from previous years, you can receive matching grants worth up to $1,000 per year.
For example, if you contribute $1,000 to your child’s RESP, you will receive a matching CESG contribution of $200. However, if you contribute $10,000, you will only receive $500, since $2,000 (or 20 percent of $10,000) exceeds the annual maximum.
As of 2019, if your family’s net income falls below $95,259, the ESDC will also provide you with an additional 10 percent on the first $500 you contribute. If your income is below $47,630, you will receive an extra 20 percent on the first $500 contributed.
For example, if your family earns a net income of $40,000 per year and you contribute $500 to your child’s RESP, you can receive the 20 percent match of $100 plus an additional 20 percent match. Therefore, by contributing $500, you can actually deposit $700 in your child’s RESP.
Canada Learning Bond
If your child was born after January 1, 2004 and you have a low enough income, you may also qualify for the Canada Learning Bond.
If you are eligible, the government will provide you with $25 to cover the cost of opening an RESP. It will also contribute $500 when you apply, and an additional $100 per year until your child turns age 15.
Tax-Free Savings Account
In order to open a Tax-Free Savings Account, you must be age 18. Therefore, you cannot open a TFSA on behalf of your child. However, you can save money in one of these accounts and later use the proceeds to help with child rearing or education expenses. Contribution limits vary depending upon your year of contribution. For example, you can contribute up to $6,000 to your TFSA in 2019. 2018’s contribution limit was $5,500. If you don’t contribute to your TFSA in one year, the unused contribution room will be available in the the next year.