Saving for education is a long-term project for your clients. The Registered Education Savings Plan (RESP) provides a structured way to help them prepare for post-secondary costs without taking on unnecessary tax burdens.
In this article, Wealth Professional Canada will highlight what the RESP is and how Canadians can use it for their education funding. We'll also include the latest RESP news at the bottom of the page, so feel free to scroll below or share this with your clients!
An RESP is a long-term savings arrangement that helps your clients put money aside for a child's education after high school. This can include:
Any adult can open an RESP. They can open one for their own or someone else's child. An adult can also open a plan to save for their own studies or for another eligible adult.
Watch this video to learn more about RESPs:
Want to be one of the best financial advisors in Canada? Show your clients how RESPs can turn simple savings into better funding for education!
There are three main roles in every RESP:
This is the person who opens the plan with a financial institution or group plan dealer. The subscriber can be a parent saving for a child or a grandparent contributing for their grandchild. They can also be an adult opening a plan for themselves. The subscriber decides how much to contribute and when.
This is the person who will eventually use the money to pay for education after high school. This is usually a child, but it can also be an adult. In some cases, the subscriber and beneficiary are the same person.
This is the financial institution or group plan dealer that administers the RESP. The promoter holds the money, applies for available benefits, tracks government incentives, and releases funds when the beneficiary goes on to further studies.
When a subscriber opens an RESP and names a beneficiary, the promoter can apply for education savings incentives on the beneficiary's behalf:
Money inside a Registered Education Savings Plan grows on a tax-deferred basis. Contributions themselves are not tax deductible, but investment earnings and government incentives grow without annual tax while they remain in the plan.
Later, when the beneficiary uses the RESP for post-secondary education, the taxable amounts are generally taxed in the beneficiary's hands. Since students often have little or no other income during their studies, RESP withdrawals for education can be very tax efficient.
Your clients can choose from these three types:
A family plan allows a subscriber to name more than one beneficiary. The beneficiaries must be related to the subscriber by blood or adoption.
This can include children, stepchildren, grandchildren (including adopted grandchildren), or siblings of the subscriber. Nieces, nephews, aunts, uncles, and cousins do not qualify as related beneficiaries for this purpose.
One survey shows that younger Canadians are already saving more and looking for ways to protect their future. A family plan can be a simple way to turn that new savings habit into focused education funding.
Earnings in a family plan can also be shared among all beneficiaries. The CESG is tracked per beneficiary and can be used by any eligible child in the plan, up to a lifetime CESG limit of $7,200 per beneficiary.
The CLB is paid only for beneficiaries who qualify and is tracked separately, up to $2,000 per eligible child. Provincial grants such as the BCTESG and the QESI can also be shared within a family plan, subject to their own limits and rules.
An individual RESP has only one beneficiary. The beneficiary does not need to be related to the subscriber. This option can work when a client wants to save for a child who is not related by blood or adoption.
Group RESPs pool the savings of many subscribers who are all saving for beneficiaries born in the same year. These plans are offered by group plan dealers and have their own set of rules and schedules.
In a group plan, a client usually agrees to make regular contributions for a set period. Stopping or changing those payments can lead to fees or reduced benefits, so it is vital to understand the contract in detail.
The interest on personal contributions can be shared within the group. However, interest earned on government incentives is tracked for each beneficiary and stays with that beneficiary.
RESP rules do not set an annual contribution cap. Instead, they set a lifetime limit of $50,000 in contributions for each beneficiary, across all RESPs that name that beneficiary.
This means your clients can choose the schedule that works best for them, as long as they stay within that $50,000 lifetime maximum per beneficiary. Some promoters will encourage regular monthly contributions, while others let subscribers contribute whenever they wish.
If total contributions for a beneficiary across all RESPs go over $50,000, the excess amount is considered an over-contribution. Each subscriber who contributed to that beneficiary shares responsibility for the excess.
Over-contributions come with a tax penalty of one percent per month on the subscriber's share of the excess, until the extra amount is withdrawn.
When contributions are withdrawn to fix an over-contribution, the effect on the CESG depends on how large the over-contribution is at the time of withdrawal. If the total excess for that beneficiary is $4,000 or less, your clients can withdraw contributions to correct the issue. They can do so without having to repay CESG on that specific withdrawal.
If the excess amount is more than $4,000 at the time of withdrawal, CESG must be repaid on the full amount withdrawn. Plus, the grant room linked to that CESG is not restored.
RESP rules can be easy to overlook. This begs the question: what do you need to remember about RESPs?
The 13-week rule limits how much of an Educational Assistance Payment (EAP) your clients can receive when they first qualify. For a qualifying educational program, your clients can receive up to $8,000 in EAPs during the first 13 consecutive weeks of enrolment.
After this, there is no limit as long as they remain continuously enrolled.
Family situations change, and your clients might want to add or switch beneficiaries. To add another child to a family RESP:
If government incentives have already been paid into the plan, a sibling of an existing beneficiary can be added without having to repay those incentives.
However, if your clients add a beneficiary who is not a sibling of the current beneficiaries, federal and provincial incentives in the plan will need to be repaid.
Subscribers can change the beneficiary in individual, family, or group plans. When they do, contributions that were meant for the original beneficiary are now considered to be for the new one. If the new beneficiary already has their own Registered Education Savings Plan, there is a risk of over-contribution.
There are two exceptions that reduce this risk:
Whenever your clients want to switch beneficiaries, it is wise to review all existing RESPs and contribution totals for both beneficiaries before making changes.
A single beneficiary can be named on multiple Registered Education Savings Plans at different institutions. There is no limit on the number of plans, but the lifetime contribution limit of $50,000 still applies across all of them.
The CESG is paid on a first-come, first-served basis each year. It goes to the RESP that receives contributions first, up to the annual and lifetime CESG limits. If contributions are made to more than one RESP on the same day, the CESG is shared between them according to how the contributions are split.
When your clients use monthly contributions through different promoters, the CESG is paid into each plan until the annual or lifetime grant maximums are reached. This is another reason to keep accurate contribution records across all plans.
RESPs can help clients prepare for education costs in a thoughtful and tax-efficient manner. They bring together personal savings, government incentives, and long timelines. With this, families and adult learners have more options when it is time to pay for school.
RESPs are not just about putting money aside. They are about giving your clients flexibility when plans change and making better use of support from federal and provincial programs.
Trump accounts bring US$1,000 federal seeds and a US$6.25 billion pledge
Financial stress among Canadians prompts Edward Jones to expand educational resources
The Nasdaq-100®'s commitment to innovation
Infrastructure spending and public service job cuts dominate the story, key insights for advisors can be found in the details
Estate and decumulation considerations discussed amid rising education costs
According to Equiton's SVP, Business Development, private multifamily rental apartment funds are well-suited for long-term investment and beyond
Wealthsimple presses Ottawa to curb exit charges while analysts warn fee hikes could erode bank trust
Get to know the biggest robo-advisors in Canada. This guide lets you understand who's leading the digital investing space and what it means for your practice
Canada Life RRSP plans offer powerful tools for retirement planning. Learn how financial advisors can help clients maximize their long-term savings
Looking to strengthen your clients' portfolios? Read this guide to learn why investing in BMO mutual funds could be the key to achieving their investment goals
