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Registered Education Savings Plan (RESP): the Basics

I will be talking about RESP in the next few posts. The first will touch upon RESP basics related to cash payments made into RESPs; it will be followed by discussion on the payments the beneficiaries receive when they start to pursue post-secondary studies. A third post will compare some of the most common registered savings plans, such as RRSP, TFSA and RESP (you might have noticed that the S in each of the acronyms stands for SAVINGS).

Let’s start with a very brief summary.

A Summary

An RESP can be used to put money aside for a child’s post-secondary education. The governments make grants into the RESPs, in the form of CESG from the federal government, QESI from Quebec (there are provincial grants from other provinces too). There are limits as to what amounts of money could be paid into an RESP. No more than $50,000 in contribution can be put into one child’s RESP, any amount in excess of which will be subject to a penalty of 1% per month. If an RESP account is established in a child’s name in the year he/she is born, a $2,500 annual contribution would be enough to receive the maximum grants before his/her 16th birthday. Additional CESG or QESI may be paid for families with lower income. It should be noted that additional grants would not change the maximum grants available.

The maximum grants a Quebec resident can receive through the RESP program is: 7,200 (federal CESG) + 3,600 (Quebec QESI)+ 2,025 (federal CLB) = $12,825. The minimum contribution to receive the full grants is $30,000. (In the case of yearly contribution of $2,500, in 12 years’ time, the maximum would be reached: 12 * 500 * 40% + 12 * 2,000 * 20% = $7,200 plus 12 * 500 * 20% + 12 * 2,000 * 10% = $3,600). The CLB is paid into the RESP account up to the 15th birthday of a child.

In the case where enough unused grant room is always available, the maximum CESG and QESI could be received in less than 7 years (CESG $1, 000 + 100 + QESI $500 + $50 = $1,650/year) .

In the following paragraphs, we will talk about 1) some concepts and some rules; 2) some numbers; 3) some examples.

Some Concepts, Some Rules

1) RESP: short for Registered Education Savings Plan. It’s a federal program which encourages long-term educational planning for children. And adults too. The “R” means registered with Canada Revenue Agency. RESP has two major benefits over other types of savings account for a child’s post-secondary education: a) Funds in an RESP account grow tax-free; b) RESP accounts can receive government grants.

Since 2007, RESP contributions are not capped for any year, as long as the total accumulated contribution made for one beneficiary does not exceed the lifetime maximum of $50,000. From 1998 to 2006, the annual contribution had been limited to $2,000.

Payment of education savings incentives such as RESG or QESI  are not considered RESP contributions.

2) Subscriber: the person who establishes an RESP account in the name of a child, usually a parent or a grandparent. The child then becomes the beneficiary.

3) Promoter: A financial institution that offers RESP accounts. After an RESP account is opened with the financial institution, the institution will send the information regarding the RESP account to the governments and apply for CES (and QESI) grants on behalf of the subscriber. It will also be responsible for making Education Assistance Payments when the child starts post-secondary education.

4) CESG: stands for Canada Education Savings Grant, which is capped at $7,200 per child. It’s paid directly into a child’s RESP accountCESG is an education savings incentive administered by the Canada Education Savings Program (CESP), Employment and Social Development Canada (ESDC).

The CESG payments are made on a monthly basis.

The CESG is comprised of two components:

  • Basic CESG: 20% on the first $2,500 of contributions each year to an RESP; it’s available to all eligible RESP beneficiaries; with sufficient unused grant room, the CESG can reach a maximum of $1,000 a year;
  • Additional CESG: either 10% or 20% on the first $500 of contributions each year (after an income-based test).

CESGs will not be paid for RESP beneficiaries for the year in which they turn 18 years of age, or in any subsequent year. Besides, in the year when a child turns 15, no CESG or QESI payments will be made unless

  • a minimum of $2,000 has been contributed into the child’s RESP accounts by the year end; or
  • a minimum of $100 contribution has been made in the RESP account in any four years before age 15. (Therefore, it would be beneficial to contribute at least 100$in the child’s RESP account, so that when times are better and you want to make more contributions, you could still benefit from the government’s grants)

5) Additional CESG: For lower income families, the Federal government pays an additional 10% or 20% in CES grant on the first $500 contribution into the RESP account a year. Income used in determining eligibility for the Additional CESG comes from the most recent tax information available. And that information is used in the determination of eligibility for an entire calendar year.

For 2018, if the family income is $46,605 or less, additional CESG is calculated at 20% on the first $500 contribution; if 2018 family income is between $46,605 and $93,208, additional CESG is calculated at 10%.

6) Canada Learning Bonds: The CLB provisions apply to children born after 2003 and who have an RESP established in their names. Those children are eligible for the CLB if their family is eligible for the National Child Benefit Supplement. In the first year of eligibility, a $500 + 25 initial grant is paid into the child’s account. In each subsequent year of eligibility, a CLB contribution of $100 will be made. This continues until the year in which the child turns 15 years of age.

A child is eligible for CLB if he/she:

  • is from a low income family (based on the adjusted income of the PCG, including the income of the cohabiting spouse or common-law partner;
  • is born on or after January 1, 2004;
  •  is a resident of Canada;
  • have a valid SIN;
  • is named in an RESP.

7) QESI: Quebec Education Savings Incentive. QESI is paid at the rate of 10% of a year’s contribution to a maximum of $250 a year. The yearly QESI grant can be increased up to $500 (since 2008) if enough grant-eligible contribution room is available. Additional QESI payment is available for children whose family income meets certain criteria.

8) Grant room: Grant room results when less than $2,500 is contributed into an RESP annually (or $2,000 for years from 1998 to 2006). From 1998 to 2006, the grant room increases by $400 a year; since 2007, $500 is added to the grant room. Grant room is made available for every eligible beneficiary every year until the year in which he/she turns 17 years of age. Even if an RESP has not yet been opened for an eligible beneficiary. The unused CESG amounts accumulate and can be carried forward until December 31 of the year in which the child turns 17 years of age.

It’s important to note that no grant room is available for years when the beneficiary was not a resident of Canada. See Example 2.

9) Accumulated Rights: the Quebec way of referring to “grant room”.

10) Family plan: Family plans are typically established for several siblings under age 18. The same contribution limits per beneficiary apply, but payments are not limited to each child’s “share” of the contributions.

11) Scholarship Plans: available through “scholarship trust companies” such as the Canadian Scholarship Trust Plan (offering both group plans and individual plans).

12) Self-Directed Plans: allow investors to choose their own investments. The list of qualified investments is similar to that applicable to self-directed RRSPs.

Some Numbers

1) 50,000: Maximum RESP contribution per beneficiary;

2) 7,200: Maximum CES grants per beneficiary from the Federal government;

3) 3,600: Maximum QESI grants per beneficiary from the Quebec provincial government;

4) 2,025: Maximum CLB grants per beneficiary. In the first year the child is eligible, $500 will be paid into the child’s RESP account, plus $25 to cover fees for opening an account. In each of the years up to the year the child turns 15, a 100-dollar CLB payment is contributed to the child’s RESP, as long as the family’s income meets the income requirements;

5) 500: The maximum CES grant per year per beneficiary; It’s also the amount of the initial CLB grant;

6) 1,000: The maximum CES grant per year per beneficiary, if enough contribution room is available from previous years and a minimum of 5,000$contribution is made during the year;

7) 2,500: the contribution needed to receive the maximum CES grants & QESI grants in a year;

8) 5,000: Contribution that can be made to make use of previous years’ unused contribution room;

9) 20%: CES grant rate;

10) 20%: Additional CES grant rate;

11) 10%: QESI & Additional CES grant rate;

12) 100: Maximum yearly CLB grant;

Some Examples

Example 1: Ariana was born in February 2007. Her parents opened an RESP account in her name at the Bank of Montreal in March 2008. Her parents’ income met the criteria to receive National Child Benefit Supplement and additional CESG at 20% in 2008, 2009, and 2010. Then her father was promoted and received a big salary boost and was no longer eligible to receive additional CESG or National Child Benefit Supplement. From 2008 to 2017, her parents contributed $1,000 per year into her RESP account. Let’s see how much CESG, QESI and CLB would her RESP account receive.

From 2008 to 2010, for each of the three years,

CESG: $1,000 * 20% = $200

QESI: $1,000 * 10% = $100

Additional CESG: $500 * 20% = $100

Additional QESI: $500 * 10% = $50

For the three years, a total of 3 * (200 + 100 + 100 + 50) = $1,350

From 2011 to 2017, for each of the 7 years,

CESG: $1,000 * 20% = $200

QESI: $1,000 * 10% = $100

Or 200 + 100 = $300 each year, a total of $300 * 7 = $2,100.

Plus CLB payments of $725 from 2008 to 2010:

CLB: $500 (in 2008) +$25 (in 2008) + $100 (in 2009) + $100 (in 2010) = $725

Ariana’s RESP account should (be eligible to) receive $1,350 + $2,100 + $725 = $4,175 by 2017. 

Example 2: Zakary was born in 2002 in Germany. In June 2010, he moved to Canada join his parents, who were permanent residents. A friend told his father that Zakary was entitled to receive money from the government for his education. He looked it up on the internet and decided to open an RESP for Zakary. The Education Savings Plan account was opened with the Bank of Montreal and registered with CRA in December 2012. Contributions he made were as follows: $7,000 in 2012, $5,000 in each of the years from 2014 to 2018. Zakary’s father wanted to know how much basic CESG amounts will be paid into Zakary’s RESP for all those contributions.

Let’s first find out how much grant room was available to Zakary. Since Zakary became a Canadian resident in 2010, $500 of grant room is added to his RESP.

Year Age Grant Room Added for the year CESG received Unused CESG amounts
2010  8 500 0 500
2011 9 500 0 1,000
2012 10 500 1,000 500
2013 11 500 0 1,000
2014 12 500 1,000 500
2015 13 500 1,000 0
2016 14 500 500 0
2017 15 500 500 0
2018 16 500 500 0
2019 17 500
Total 5,000

The $7,000 contribution in Zakary’s RESP would attract a CESG amount equal to 20% of the first $5,000. No CESG would be paid on the remaining $2,000 contribution. By end of 2012, there was an unused grant room of $500.  No contribution was made in 2013; therefore, the unused grant room increased to $1,000. The $5,000 contribution in 2015 would use up the entire accumulated unused CESG amount.

In 2016 to 2018, only the first $2,500 contributed in the year would attract CESG of $500 a year.

If no less than $2,500 is contributed in Zakary’s RESP in 2019, he will receive another $500 in his RESP.

Please note that since he turns 17 in 2019, there will be no more CESG grant room added to his RESP.

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