A back-to-school financial tool: the RESP

The start of a new school year is a perfect time to rediscover a financial tool designed to ease the monetary burden on parents once their children are ready for post-secondary studies: the registered education savings plan (RESP).

If you have children in grade school, you’ve probably just been through the back-to-school adventure with all its expenses: clothing, textbooks, school supplies… And you might have found yourself wondering what it will be like when the kids move on to post-secondary education.

The following illustration gives some idea of what a four-year university program might cost for a student who is no longer living at home, depending on the province. These figures are based on a calculator that factors in today’s costs, an annual tuition-fee increase of 4.5% (which is the current 10-year average) and an inflation rate of 2%.

Map of Canada showing the cost of four years of university in each province for a student who is no longer living at home. Two values are given for each province: one for today’s cost and one for the cost in 18 years. The amounts include tuition, room and board, but not books, school supplies, transportation or personal expenses. Ontario is the province where it will cost the most to study in 18 years, at close to $123,000 for four years of university, while Newfoundland and Labrador is the least expensive, at just over $52,000. The other provinces fall between these two extremes. Note that, along with Ontario, there are three other provinces where the cost will be over $100,000: British Columbia, Saskatchewan and Nova Scotia.

As we can see, saving up these amounts is no small effort, even for parents with a substantial income. This is where the registered education savings plan (RESP) comes in.

At a glance

The RESP is a tax-deferred plan, like the registered retirement savings plan (RRSP). All the money you contribute grows in a tax-sheltered environment until it is withdrawn to pay for your child’s needs during post-secondary education. The capital will then be returned to the contributor tax free, and the taxable earnings will be attributed to the student, who will probably be in the lowest tax bracket at that point.

Unlike the RRSP, RESP contributions cannot be deducted from your income. On the other hand, they do provide eligibility for grants that can amount to a minimum of 20% of the annual contribution, and even more, depending on the province. There is no annual contribution limit, but there is a lifetime RESP contribution limit of $50,000, while the grants can add up to $7,200, and more in some provinces.

An RESP can be an individual plan (one child as the beneficiary) or a family plan. Finally, the parents are not the only ones who can make contributions: for example, it’s not unusual for grandparents or godparents to lend a hand. Eligibility depends on the type of RESP.

How the grants work

The main grant is the Canada Education Savings Grant (CESG), which has two components: the basic CESG equal to 20% of the amount contributed, regardless of family income, and the Additional amount, which can add from 10% to 20% if family income is below $95,259 in 2019. However, the lifetime maximum for the grants is $7,200 in any case. Note that low-income families are also eligible for the Canada Learning Bond of up to $2,000.

In Quebec, the Quebec Education Savings Incentive can add 10% to the amount contributed, to a maximum of $3,600 over the lifetime of the plan. In B.C., the British Columbia Training and Education Savings Grant can provide additional aid of up to $1,200.

Beyond the grants

It might be tempting to count mainly on these grants to build an RESP.

However, as the following graph shows, this strategy may prove to be inadequate. Let’s assume that the parents contributed $2,500 per year, allowing them to maximize the CESG, and obtained an average annual return of 4%. By the third year of studies at an Ontario university, their child would be running out of money: in four years, the shortfall would be $40,000. Higher annual contributions could alleviate this.

 

Bar graph showing the growth of savings in an RESP where the contribution is $2,500 per year, enough to maximize the Canada Education Savings Grant. The calculation is based on a student in Ontario and assumes an annual average return of 4%. The resulting curve shows that capital accumulation will be more than $60,000. However, given the cost of education, a shortfall is shown by the third year of studies: there is no longer enough money to finance the remaining years of education.

 

The bottom line

On the whole, the RESP could be an advantageous tool for a number of reasons:

  • Almost anyone close to the child can contribute;
  • Savings are tax-sheltered as they grow;
  • Grants can amount to $7,200, or more;
  • Catch-up contributions are allowed;
  • When withdrawn, any returns are taxed in the hands of the child.

Still, RESPs are subject to quite a few rules, which are summarized on this Government of Canada website. For this reason, professional advice is recommended to help make educated RESP decisions.

 

The following sources were used to prepare this article:

Get Smarter About Money, “RESP Savings”.
Government of British Columbia, “British Columbia Training & Education Savings Grant Information”.
Government of Canada, “Registered Education Savings Plans (RESPs)” ; “Canada Education Savings Programs (CESP)”.
Revenu Québec, “Québec Education Savings Incentive”.