A Registered Education Savings Plan (RESP) is a government-registered investment account designed to help Canadians save for a child's post-secondary education. It functions as a long-term savings vehicle where contributions can grow tax-deferred and are supplemented by federal and provincial government grants. The primary advantages include access to the Canada Education Savings Grant (CESG) and the potential for investment earnings to be taxed at the student's typically lower tax rate upon withdrawal. For families planning for future education costs, an RESP is a central tool for building an education fund.
How a Registered Education Savings Plan Works
An RESP is a contract between a subscriber, who opens and contributes to the plan, and a promoter, which is the financial institution or provider that administers it. The future student is designated as the beneficiary of the account. Contributions made by the subscriber are not tax-deductible, but the investment growth within the plan accumulates on a tax-deferred basis. When the beneficiary enrolls in a qualifying post-secondary program, money can be withdrawn to pay for education expenses. Withdrawals of the original contributions are tax-free to the subscriber. The investment earnings and any government grants are paid to the student as Educational Assistance Payments (EAPs), which are taxed as income in the student's hands. Because students often have little other income and can claim education-related tax credits, they typically pay little or no tax on these withdrawals. The plan can remain open for a maximum of 35 years, and contributions can be made for up to 31 years, providing a long savings horizon.
The mechanics of an RESP can be thought of as three distinct money streams working together. The first stream is the subscriber's contributions, which form the principal of the investment. The second stream consists of government grants and bonds, such as the CESG and CLB, which are added based on eligibility. The third stream is the investment earnings generated from investing the combined funds of contributions and grants. Each of these streams is treated differently for tax purposes when funds are eventually withdrawn for educational purposes, which is a key feature of the plan's design.
Government Grants and Incentives
The Canadian government provides significant incentives to encourage education savings through RESPs. The primary federal grant is the Canada Education Savings Grant (CESG). The basic CESG provides a 20 percent match on annual contributions, up to $500 per year based on the first $2,500 contributed. Unused grant room can be carried forward, allowing a subscriber to catch up on missed contributions in future years, though the maximum CESG that can be received in one year is $1,000. The lifetime maximum CESG per beneficiary is $7,200. For lower-income families, an Additional CESG may provide an extra 10 or 20 percent on the first $500 contributed annually, depending on the family income of the beneficiary's primary caregiver. The Canada Learning Bond (CLB) is another federal program for children from low-income families, providing an initial $500 when an RESP is opened and $100 for each subsequent year of eligibility, with no personal contributions required. To be eligible for the CLB, a child must be born on or after January 1, 2004, and the family must receive the National Child Benefit.
Several provincial governments have also offered supplemental grants, though some are no longer accepting new applicants. The Alberta Centennial Education Savings (ACES) grant provided $500 at birth and $100 when a child turned 8, 11, and 14, but the program was closed to new applicants after July 31, 2015, following a phase-out announcement in March 2013. Saskatchewan introduced the Saskatchewan Advantage Grant for Education Savings (SAGES), with legislation intended for implementation in 2013. In Quebec, the Quebec Education Savings Incentive (QESI) provides an annual contribution equal to 10 percent of net RESP contributions, up to a maximum of $250 per year. The QESI was launched in February 2007 following advocacy and a financial study commissioned in 2006. British Columbia also offers an additional grant for residents, as noted in some provider materials.
Types of Registered Education Savings Plans
There are three main structures for RESPs, each with different rules and flexibility. An Individual RESP is set up for a single beneficiary, and the subscriber does not need to be related to the child. Contributions can be made on a flexible schedule. A Family RESP allows one or more beneficiaries who are related to the subscriber by blood or adoption, such as siblings or grandchildren. Contributions and government grants within a family plan can be shared among the beneficiaries, providing flexibility if one child does not pursue post-secondary education. A Group RESP, also known as a Group Scholarship Plan, pools contributions from many subscribers with children of similar ages.
- Individual RESP: For one beneficiary, flexible contributions, subscriber need not be related.
- Family RESP: For multiple related beneficiaries, allows sharing of funds among them.
- Group RESP: Contributions pooled, often has a fixed payment schedule and may impose penalties for missed payments.
Group plans have faced scrutiny and legal action, such as a lawsuit filed in March 2021 against six providers in Quebec, alleging hefty fees through the sale of multiple units, potentially contravening a fee cap. These plans often charge penalties for subscribers who leave the plan early, which can include forfeiture of earned interest, a practice also referred to as attrition. The lawsuit is currently limited in scope to plans sold in Quebec, but success could invite similar actions in other provinces. Unlike individual or family plans, the payment schedule in a group RESP is typically fixed for the duration of the contract, and your contributions are pooled with those of other contributors.
Contribution Rules and Limits
RESPs have clear contribution limits and rules governing who can contribute. There is a lifetime contribution limit of $50,000 per beneficiary. Contributions can be made for up to 31 years, and the plan itself can remain open for a maximum of 35 years. There is no annual contribution limit, but to maximize the Canada Education Savings Grant, a subscriber typically aims to contribute at least $2,500 per year to receive the full $500 match. Anyone can contribute to an existing RESP, including parents, grandparents, other family members, and friends. Some financial institutions offer tools like RESP gift cheques to facilitate contributions from extended family. If contributions exceed the $50,000 lifetime limit, the excess is subject to a 1 percent tax per month until it is withdrawn.
The flexibility of contribution schedules is a noted feature, with many providers allowing for regular pre-authorized contributions or lump-sum deposits. There is no minimum age for a beneficiary, which is why many accounts are opened shortly after a child's birth to maximize the compounding period. Both the subscriber and the beneficiary must be Canadian residents and have Social Insurance Numbers to open an RESP. While the lifetime limit is $50,000, any contributions over this amount do not attract government grants and are subject to the penalty tax. The ability to carry forward unused CESG room allows for strategic contributions in later years to catch up on missed grants.
Withdrawals and Plan Termination
Funds within an RESP are intended for post-secondary education, but there are rules for various scenarios. When a beneficiary enrolls in a qualifying full-time or part-time program at a college, university, trade school, or CEGEP, Educational Assistance Payments (EAPs) can be withdrawn. EAPs consist of the investment earnings and government grants and are taxable to the student. The subscriber can also withdraw their original contributions tax-free at any time, though any associated CESG must be repaid. If the beneficiary does not pursue post-secondary education, the subscriber has options after the plan has been in place for at least 10 years and all beneficiaries are over 21. The accumulated investment income, known as an Accumulated Income Payment (AIP), can be withdrawn by the contributor but is taxed as regular income at their marginal rate plus an additional 20 percent penalty tax. Alternatively, the AIP can be rolled into a Registered Retirement Savings Plan (RRSP) if contribution room is available, avoiding the penalty. The subscriber can also change the beneficiary to another qualifying family member, particularly within a family plan.
Early withdrawals of contributions by the subscriber trigger specific consequences. Any eligible CESG payments on those withdrawn contributions must be repaid to the government. If the beneficiary had also received Additional CESG, none of the beneficiaries in the plan will be eligible for Additional CESG for the next two years. When a student uses the funds, they must claim all EAPs as income on their tax return in the year received. However, because students are often in the lowest tax bracket and can claim the personal amount and education tax credits, this usually results in little or no tax. If the plan is terminated because no beneficiary attends post-secondary school, the AIP withdrawal rules apply, emphasizing the importance of the 10-year and age 21 conditions.
Risks and Considerations for Subscribers
While RESPs are powerful savings tools, subscribers should be aware of certain rules and potential risks. The requirement to repay CESG grants if contributions are withdrawn early can reduce the account's value if savings plans change. For group RESPs, the fixed payment schedules and potential penalties for missed payments or early exit can be restrictive and costly. The lawsuit against group plan providers highlights concerns about fee structures and transparency. Investment risk is also present, as the value of investments within the RESP can fluctuate, though the plan can hold a variety of assets like Guaranteed Investment Certificates (GICs), mutual funds, and savings deposits. Furthermore, if a beneficiary does not attend post-secondary school and the AIP is withdrawn as income, the additional 20 percent tax can represent a significant financial penalty, making the RRSP rollover option valuable if available.
Other considerations include the fact that some providers charge fees for transferring an RESP to another company outside their group, such as a $150 transfer fee noted by one major bank. While many financial institutions promote no charge to open an RESP and no annual administration fees, it is important to understand all potential costs associated with the specific plan and promoter. The investment flexibility varies by provider, with options ranging from self-directed portfolios including ETFs and stocks to simpler savings accounts or guaranteed investment products. The choice between individual, family, and group plans carries long-term implications for control, flexibility, and cost, which should be carefully evaluated against the family's financial situation and goals.
Historical Development of RESPs and Grants
The RESP program has evolved with the introduction of new grants and adjustments to limits. The Canada Education Savings Grant was enhanced in the 2007 federal budget, which set the annual maximum at $500 and the lifetime maximum at $7,200. The Additional CESG for lower-income families was introduced in 2005. The Canada Learning Bond began for children born on or after January 1, 2004. Provincial programs have also come and gone. The Alberta Centennial Education Savings grant was introduced in 2005, announced for phase-out in 2013, and officially closed to new applicants in the 2015/16 fiscal year. Saskatchewan announced its SAGES program for implementation in 2013. Quebec's QESI incentive launched in February 2007 following advocacy and a financial study commissioned in 2006.
| Year | Key Development |
|---|---|
| 2004 | Canada Learning Bond starts for children born on or after Jan. 1. |
| 2005 | Additional CESG introduced. Alberta ACES grant begins. |
| 2007 | Federal budget sets CESG max at $500/year, $7,200 lifetime. QESI launches in Quebec. |
| 2013 | Alberta announces ACES phase-out. Saskatchewan announces SAGES. |
| 2015 | Alberta ACES closes to new applicants after July 31. |
| 2021 | Lawsuit filed against six Group RESP providers in Quebec. |
The historical context shows a pattern of federal and provincial governments using RESPs as a vehicle for education policy, with grants targeting both general savers and low-income families specifically. The closure of the Alberta program illustrates how provincial incentives can change with government priorities. The ongoing existence of the QESI and mention of a British Columbia grant indicate continued provincial involvement in some regions. The 2021 lawsuit marks a significant moment of consumer scrutiny regarding the practices of certain segments of the RESP industry, particularly group scholarship plans.
Comparison to Other Education Savings Vehicles
The RESP is a uniquely Canadian program, but it is useful to understand how it compares to similar instruments in other countries. The closest analogue is the United States' 529 plan, which is also a tax-advantaged savings plan for education expenses. Unlike the RESP, contributions to a 529 plan are not matched by a federal grant, though some US states offer tax deductions or credits. Both plans allow for tax-deferred growth and tax-free withdrawals for qualified education expenses. Within Canada, RESPs are distinct from other registered accounts like Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs) due to their specific purpose, grant structure, and rules regarding beneficiaries and withdrawals. While savings can be held in non-registered accounts or other registered plans for education, the combination of government grants, tax-deferred growth, and favourable tax treatment on withdrawal makes the RESP the most efficient dedicated education savings tool available to Canadians.
Key distinctions include the fact that RESP contributions are not tax-deductible, unlike RRSP contributions. However, the tax treatment on withdrawal is generally more favourable for a student beneficiary than an RRSP withdrawal would be for the contributor. A TFSA offers tax-free growth and withdrawals for any purpose, but it does not provide any government grants. Therefore, for long-term education savings, the RESP's grant advantage typically outweighs the flexibility of a TFSA for the specific goal of funding post-secondary education. The ability to have multiple contributors and the existence of family plans also differentiate RESPs from individual savings accounts.
Frequently asked questions
How does the RESP grant work?
The main grant is the Canada Education Savings Grant (CESG). The federal government adds 20 percent to your annual contributions, up to $500 per year on the first $2,500 you contribute. There is a lifetime maximum grant of $7,200 per child. Lower-income families may qualify for an Additional CESG.
What is an RESP?
A Registered Education Savings Plan (RESP) is an investment vehicle available in Canada for caregivers to save for a child's post secondary education. It is a tax shelter designed to benefit post secondary students. The principal advantages are access to the Canada Education Savings Grant and a method of generating tax deferred income. Contributions are taxed at the contributor's rate while investment growth and grants are taxed on withdrawal at the recipient's typically lower rate. The plan helps fund post secondary education through a combination of savings, government grants, and tax efficient growth.
What is the Canada Learning Bond?
The Canada Learning Bond is a grant provided by the Government of Canada to encourage low income families to contribute to an RESP. It provides an initial $500 when an RESP is opened for an eligible child. Families will also receive $100 for each year they remain eligible. This benefit is for children born on or after January 1, 2004, whose families receive the National Child Benefit. The CLB is deposited directly into the RESP and does not require any personal contributions from the family to receive it.
What happens if my child doesn't go to college or university?
If the beneficiary does not pursue post secondary education, the contributor can withdraw all personal contributions tax free. However, the accumulated income or interest earned on contributions is taxed at the contributor's regular income tax level plus an additional 20 percent. This withdrawal of accumulated income is called an Accumulated Income Payment and requires the plan to be in place for at least 10 years with all beneficiaries over 21. Alternatively, this income can be rolled into a Registered Retirement Savings Plan subject to contribution limits.
Who can open an RESP?
An RESP is a contract between a subscriber and a promoter, which is often a bank, mutual fund company, or group RESP provider. The plan is available to caregivers to save for their children's education. It can be opened by parents, guardians, or other family members who want to save for a child. The subscriber is the person who opens and contributes to the plan, and the beneficiary is the child whose education will be funded. Both the subscriber and beneficiary must have a Social Insurance Number.
What is the difference between an individual and a family RESP?
An individual RESP names one specific beneficiary. A family RESP is designed for multiple beneficiaries who are related to the subscriber by blood or adoption. In a family plan, contributions and government grants can be shared among the beneficiaries. Group RESPs are another type where individual contributions are pooled with those of other contributors according to a set schedule. Family plans offer flexibility for saving for more than one child within a single registered education savings plan contract.
Sources and further reading
- Registered Education Savings Plan (Wikipedia) en.wikipedia.org
- A Registered Education Savings Plan (RESP) is an ... cst.org
- RESP Canada: Education Savings and Planning, Embark embark.ca
- Registered Education Savings Plans (RESP) scotiabank.com
- Registered Education Savings Plan (RESP) rbcroyalbank.com
- What is an RESP? Registered Education Savings Plan Guide wealthsimple.com
This article explains how things work and is not financial, tax or legal advice. Rules, limits and rates change, so check the current figures with the Canada Revenue Agency, your province or your financial institution before you act.