Help Your Child Go to College or University With an RESP

What is an RESP?

RESP stands for Registered Education Savings Plan. It's a way for people to set money aside for children's future educational needs. It's a registered account, specifically for saving for costs associated with post-secondary education. Your contributions grow tax-free, and any investment income and grant money you receive will be taxed in the hands of the student (who likely has less income than you do, so taxes due may be lower.)

You can set up a RESP for your child through your bank, credit union, or other plan administrators. The full list of providers (known as RESP promoters) can be found on the Government of Canada's web page. The fees for starting a RESP are minimal, or even free, and if you're a lower-income family, there could be money available to help with registration fees.

How does an RESP work?

To understand how an RESP works, you first need to know some definitions.

1. Subscriber: The person who sets up the RESP, usually a parent or grandparent, but can be anyone who is or isn't related.
2. Promoter: The person or organization who works with the subscriber to set up the RESP. A promoter can be your financial planner, local bank, or another administrator. The promoter also administers the RESP and pays out the funds.
3. Beneficiary: The child or grandchild for whom the fund is for.

The subscriber (you) meets with the promoter (your local bank rep or financial planner) to start a RESP for the beneficiary (your child). You'll need ID and a Social Insurance Number for the child, as well as yourself. The subscriber (you) contributes to the plan and when the time comes, the promoter pays out the funds to the beneficiary (your child).

Did someone say free money?

One of the best things about having an RESP for your child is that the government will chip in and contribute too! There's no catch - totally free. The Canada Education Savings Grant (CESG) will add 20 percent to your annual contribution, up to a maximum of $500 each year for each beneficiary, up to a lifetime cap of $7,200. You can make up for missed contributions one year at a time.

Lower-income families qualify for even more assistance. Along with extra matching of up to 40% of your contributions through the CESG, the Canada Learning Bond (CLB) provides an additional grant to help families with a modest income. After opening your RESP, $500 will be added to your child's fund if you qualify. Each year after that, a payment of $100/year is added, up to a lifetime maximum of $2,000/child.

Even if you can't afford to contribute to your child's RESP, the CLB still applies. In other words, if you're a lower-income family, you could receive up to $2,000/child just for opening an RESP.

Should I open a family or individual RESP plan?

There are different types of RESP accounts, namely an individual RESP or a family RESP. The main difference is that a family RESP can have multiple beneficiaries, while an individual RESP is for a single beneficiary. A family plan is for saving for multiple children, but they must be related by blood or adoption to the subscriber. An individual plan can be for any single person, including a non-related child or even yourself. Family plans offer flexibility to share funds and grants between beneficiaries, while individual plans are dedicated to one person.

Payments from a RESP

Once your child is ready to attend post-secondary, the promoter can begin to pay out the funds. The student must provide official proof of enrollment from an eligible post-secondary institution. These are called Educational Assistance Payments (EAPs) and include CESG and CLB amounts, as well as any income your contributions earned while in the plan. Come tax time, these amounts are taxable to the student - not the parent - and reported on a T4A - Statement of Pension, Retirement, Annuity and Other Income slip.

The money can be used for anything, not just tuition or text books. Once enrollment is confirmed, the money can be spent on whatever needs arise.

Not all education programs qualify for EAP funding, although many post-secondary institutions globally qualify. Check the CRA's list of qualifications for post-secondary EAP.

How to set up a RESP

All you need is a Social Insurance Number and ID for the child who is going to be the beneficiary, and yourself. Then it's just a matter of picking a RESP provider. You'll want to shop around as some providers charge service fees or set limits on how often you can contribute. Since a RESP can hold investments, you may consider working with an investment advisor on an investment strategy based on your investment timeline and horizon. For example, you may wish to take on more risk as you start to invest and move to more conservative investments as your child gets closer to post-secondary.

What if my child chooses not to attend post-secondary school?

If post-secondary isn't in the cards for your child after high school, don't worry - you have options. Your contributions can be transferred to another child, rolled into a different type of savings plan (such as a Registered Disability Savings Plan), or refunded (minus any CLB and CESG, of course). Talk to your RESP promoter for more details.

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