To encourage families to start saving for their children's education, the Canadian government established the Registered Education Savings Plan (RESP) in 1998. The RESP is a tax-deferred savings plan that offers substantial financial benefits, including government grants and tax breaks. Over the years, the RESP has become increasingly popular, and today it is one of the most popular ways for parents or guardians to save for a child's post-secondary education in Canada – as of 2019, 53% of families had an RESP.
With school starting back up last month, it is that time of year where RESP withdrawals are taking place. Which can come with a lot of questions and uncertainty, especially for those proud parents who might be navigating their RESPs for the first time. WealthCo Financial Planner, Owen Komperdo, walks us through the process.
The Basics of RESPs
For starters, here is a bit of background information on RESPs:
- It is not only parents and guardians that can open a RESP for a child, anyone can do so including grandparents, other relatives, or even family friends;
- One can make contributions to a RESP for up to 31 years until after it is first opened; and
- As of 2007 there is no annual contribution limit, although the lifetime contribution limit is $50,000.
Furthermore, the Canada Education Savings Grant (CESG) is an additional incentive in which the government contributes up to $500 per year (up to a lifetime maximum of $7,200) for those who are contributing at least $2,500 per year to their fund. This is free money, providing a return before it is even invested.
“Grants, and investment growth is taxed in the hands of the beneficiary,” Komperdo points out. “This is a key benefit to the RESP - in general the beneficiary will have a lower marginal tax rate than the subscriber. It is also worth noting that all investment growth in the RESP is tax deferred for the life of the plan.”
When Can an RESP be Withdrawn?
Once all the hard work of the post-secondary application process is complete, living arrangements have been made for those students who are attending school away from home, and tears have been shed, comes the part of paying for it all. Which is why RESPs exist. So, what is the first step in withdrawing from an RESP fund.
“A withdrawal for educational purposes requires proof of enrolment in a qualified institution,” Komperdo explains. “Your RESP provider can give you a list of information needed to satisfy proof of enrolment. I always recommend a student go to their school registrar office and ask for a ‘proof of enrolment letter for the purpose of a RESP redemption’. The registrar should have a property formatted letter ready to go.”
While all major Canadian universities, colleges, vocational schools, as well as many international institutions (fulltime enrollment for at least 13 weeks is required for international institutions to qualify), should qualify as eligible for RESP coverage, it is still prudent to check this list of eligible schools to ensure yours is included.
There is one restriction to be aware of regarding the redemption of the taxable portion.
“If the beneficiary is enrolled in full-time post-secondary studies, payments are limited to $5,000 during the first 13 consecutive weeks of enrollment. For those in part-time studies, payment is limited to $2,500 for every 13-week period of enrollment.”
What Expenses Are Eligible for Coverage?
According to the Government of Canada website, RESPs are administered in accordance with the Income Tax Act, so the rule of thumb around determining whether a school expense is reasonable or not is to ask yourself whether this purchase will serve to further the student’s studies.
This could include vehicle expenses (insurance, gas, parking) if a car is required to get to class. This could include a laptop or software fees. This could even include rent and meals. Books – check. Even a semester abroad – check.
What Happens if the Beneficiary Doesn’t Pursue Post-Secondary Education
“This answer can change depending if the plan is an individual or family plan,” Komperdo explains. “However, it is worth noting that RESP plans can be kept open for 36 years so if the beneficiary chooses to take time off after high school, even a decade or so, there is still ample time to take advantage of the plan.”
If that day never does come though, there are a few options for the remaining funds (not including the grants as those will always be returned to the government):
- Replace the beneficiary
- If the subscriber has the available RRSP room, up to $50,000 of the contributions (per subscriber), and accumulated income can be transferred tax-free assuming the RESP has been opened for at least 10 years, the beneficiary is at least 21, and they are a Canadian resident;
- The RESP can be closed, and the subscribers’ contributions are theirs to keep – although they will be taxed on the accumulated growth; or
- Transfer the money to a Registered Disability Savings Plan if certain conditions are met.
All of these situations have rules and regulations, therefore, as always, it is most prudent to confer with your most trusted advisor, your accountant, to best understand all your options and implications.
Owen Komperdo is a Financial Planner with WealthCo. An alumnus from the University of Calgary, Owen also has his CFP designation and has completed several classes through the Canadian Securities Institute. Owen prides himself on using both quantitative and qualitative analysis to reveal client personal and financial goals, uncover obstacles to those goals, and, ultimately, identify solutions to those obstacles in order to help them meet their goals.
The Integrated Advisory community consists of a network of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.
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