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RESP

A Registered Education Savings Plan, or RESP, is a special tax-advantaged investment plan that allows an account holder, or subscriber, to invest for the education of a beneficiary child. There are many benefits to an RESP including a government matching scheme and a versatile tax-advantaged investment opportunity, making them excellent investment choices for your child’s future.

An RESP allows a subscriber to take advantage of the Canada Education Savings Grant, or CESG, where the government matches deposits at a rate of 20% up to a benefit maximum of $500 per year and a lifetime benefit of up to $7,200 in free money. The tax-advantaged status of an RESP allows for subscriber deposited amounts to be withdrawn tax free and for government grants and investment income to be taxed at the income tax rate of the beneficiary student. Since students usually have low income and are often in the lowest income tax bracket, and have tuition and tax credits, there is often no tax paid at all.

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    What is an RESP?

    A Registered Education Savings Plan, or RESP, is a special type of investment account used to save up for and invest in a child’s post-secondary education. The advantage of an RESP is that they have a special tax advantaged position and a matching government grant that make them great tools for investing. The matching grant from the government can add up to a total of $7,200 of government money that is added to the account. RESP funds can be invested in various ways and over time can grow to a large amount that can be used to fund a child’s post-secondary education. The types of institutions that qualify for the use of an RESP are also varied and allow for many different educational opportunities, and even in the case of a change of plans the funds invested are not lost and can be transferred to an RRSP.

    How does an RESP work?

    An RESP can be opened with a special RESP investment company, or for a self-directed account they can be opened with a bank, credit union, financial planner or other investment companies that offer an RESP service. Once the information of the investor and the beneficiary are confirmed you can begin investing. One of the biggest advantages of having an RESP for your child is the Canada Education Savings Grant, or CESG. The CESG is a program that matches 20% of the investments into an RESP up to a maximum of $2,500 per beneficiary per year, meaning you can get a free $500 per year per child invested into their education. The maximum lifetime CESG amount is $7,200. Lower income families can also be eligible for an additional amount with the Canada Learning Bond which adds $500 for the first eligible year and an additional $100 each eligible year up to a maximum of $2,000 to an RESP. The maximum lifetime limit that can be invested into an RESP account is $50,000. All funds in an RESP, including those invested and those added by government matching programs, can grow tax free until it is time to withdraw. The money invested by the account holder, or subscriber, can be withdrawn tax free as Post-Secondary Education payments. The portion of the RESP account that came from government grants and any of the capital gains and investment income is withdrawn as Educational Assistance Payments (EAPs) as taxable income. The EAPs are counted towards the income of the beneficiary, who as a student is likely to have very low income and are eligible for tuition and education tax credits, meaning that overall very little to no tax ends up paid on the EAPs. If the beneficiary does not decide to go to college or university or another qualifying post-secondary institution like apprenticeships or trade schools, the amount invested by the subscriber can be transferred out to their RRSP, providing there is room. An RESP can remain open for 36 years so there is time for all parties to assess their choices.

    What are the Types of RESP Plans?

    There are 3 main types of RESP plans:
    • Individual RESP plans: This is an account held by an individual for a child beneficiary. Anyone can open one for any child, so it can be made by a parent, grandparent, other relative or family friend for the benefit of the child beneficiary
    • Family RESP plans: A family plan can have multiple related beneficiaries. This means that the account holder can open it for their children, including formally adopted ones, and their nieces or nephews.
    • Group RESP plans: A group plan has multiple account holders or investors and a single child beneficiary. This allows multiple people, such as parents and grandparents, to invest into a collective plan.

    Tips for Getting a Investment Property

    Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:

    What are the benefits of an RESP?

    • Canada Education Savings Grant: The CESG allows for a 20% matching of invested funds up to a yearly maximum of $500 and a lifetime maximum of $7,200 per child per account of free government money.
      • Canada Learning Bond: Low incomes families can be eligible for an additional lifetime benefit of $2,000 of government funds per child per account.
    • Tax Advantaged Investing: With an RESP the account holder can invest for the post-secondary education of a beneficiary child in a tax advantaged situation. The amount invested is not taxed, and the government grants and the investment gains when taken out by the beneficiary are taxed at their income level, which is usually very low as a student so often there are no taxes paid.
    • Time and Flexibility: An RESP account can be opened for a newborn child and can remain open for 36 years. Investment into the account can be done at the account holder’s discretion whether that be regular installments or lump sum deposits. The range of post-secondary institutions that qualify also give the beneficiary child the freedom to choose their path without losing out on the benefits of the RESP.

    RESP Contribution Limits

    The lifetime maximum for deposits into an RESP account are $50,000 per beneficiary. This can be done at any time however the CESG maximum yearly amount is limited to $500 of government money at a lifetime total of $7,200 so it is generally advised to spread the deposits to maximize the government matching grant. Investments into the account can be made up to and including the year the beneficiary child turns 17.

    RESP Withdrawal Rules

    Withdrawals from an RESP account can only be made by the subscriber, who must provide proof of enrollment to the financial institution. There are two types of withdrawals from an RESP, the contributions made by the subscriber known as Post-Secondary Education Payments (PSE), and that of the government grants and investment income known as Education Assistance Payments (EAP).

    PSE payments can be sent to either the subscriber or the beneficiary. EAP withdrawals can only go to the beneficiary and there is a limit of $5,000 that can be withdrawn during the first 13 weeks of the student’s schooling, after which there are no limits on how much can be withdrawn.

    Is it harder to get a mortgage if I am self employed?

    Obtaining a Self-Employed Mortgage can be more difficult than a traditional mortgage as the borrower has to take extra steps to prove to the lender that they are capable of maintaining regular payments on their mortgage. It is possible that depending on the financial institution, that Self-Employed Mortgages are not offered at all. Where they are offered, there is also the chance that banks will significantly increase the interest rates for these loans, making them a more difficult consideration for borrowers. To give a better chance at being approved, lenders are expected to offer a large down payment, up to 20% or higher, as well.

    Another difficulty associated with Self-Employed Mortgages is the lack of a T4. A full time Employee can provide proof of income through a simple T4, however a self-employed individual must provide a stated income form, which shows the amount the potential borrower claimed to have earned, and then must provide documentation which can prove the stated amount is accurate.

    Lenders will also apply the Debt Service Ratio when considering your eligibility for a loan. This is a measurement which determines your ability to maintain regular payments on a loan after all your financial responsibilities have been considered. These include monthly bills, car loans, lines of credit, student debt and any other loans.

    If after considering these other factors the bank is confident that you are able to meet their requirements for regular payments, you will be eligible for a loan.

    Commonly Asked Questions

    An RESP is a special tax-advantaged investment plan that allows a subscriber to invest in the education of a beneficiary child. The advantage of the RESP is that investments are matched by the government up to a lifetime total benefit of $7,200, making them excellent ways to save for your child’s future.
    The tax-advantaged status of an RESP allows for deposited amounts to be withdrawn tax free and for government grants and investment income to be taxed at the income tax rate of the beneficiary student. Since students usually have low income and have tuition and tax credits there is often no tax paid at all.
    There are many benefits to an RESP including a government matching scheme known as the CESG which can give the beneficiary up to $7,200 in free money, a tax-advantaged investment opportunity, and a great deal of flexibility about how they can be used. This makes RESPs excellent tools for investment.

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