A registered education savings plan (RESP) in

Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...

is an investment vehicle available to caregivers to save for their children's

post-secondary education Tertiary education, also referred to as third-level, third-stage or post-secondary education, is the educational level following the completion of secondary education. The World Bank, for example, defines tertiary education as including univers ...

. The principal advantages of RESPs are the access they provide to the

Canada Education Savings Grant The Canada Education Savings Grant (french: Subvention canadienne pour l’épargne-études, CESG) is part of a Government of Canada program, administered through Employment and Social Development Canada, to assist with savings for Canadian children ...

(CESG) and as a method of generating tax-deferred income.

Tax benefits

An RESP is a

tax shelter Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international tax laws. Types of ...

designed to benefit post-secondary students. With an RESP, contributions (comprising the investment's principal) are, or have already been, taxed at the contributor's tax rate, while the investment growth (and CESG) is taxed on withdrawal at the recipient's tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal

income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...

, owing to

tuition Tuition payments, usually known as tuition in American English and as tuition fees in Commonwealth English, are fees charged by education institutions for instruction or other services. Besides public spending (by governments and other public bo ...

and education tax credits. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the

student A student is a person enrolled in a school or other educational institution. In the United Kingdom and most commonwealth countries, a "student" attends a secondary school or higher (e.g., college or university); those in primary or elementar ...

will have a good source of income to fund their post-secondary

education Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Va ...

. If the beneficiary of an RESP decides not to pursue post-secondary education, the contributor can withdraw all contributions tax-free. However, all interest earned on contributions ("accumulated income") are taxed at the contributor's regular income-tax level, plus an additional 20 percent.

Government grants

Federal grants

Canada Education Savings Grant

The

(CESG) is provided to complement RESP contributions, wherein the

government of Canada The government of Canada (french: gouvernement du Canada) is the body responsible for the federal administration of Canada. A constitutional monarchy, the Crown is the corporation sole, assuming distinct roles: the executive, as the ''Crown ...

contributes 20% of the first $2,500 in annual contributions made to an RESP. After changes introduced in the

2007 Canadian federal budget The Canadian federal budget for the 2007–2008 fiscal year was presented to the House of Commons of Canada by Finance Minister Jim Flaherty. Flaherty presented the 2007 budget on March 19, 2007. No income tax or GST cuts were announced but ther ...

, the government may contribute up to $500 per year to a participating RESP, to a lifetime maximum of $7,200. This

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...

is available upon withdrawal from the RESP by a post-secondary recipient, with a maximum lifetime contribution of $50,000. Any contributions over this amount are subject to

taxation A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...

. The government grants introduced in 2005, entitled ''Additional CESG'', allowed an additional 10% or 20% for a total of an extra 30 or 40 cents on each dollar of the first $500 contributed to an RESP, depending on the family income of the beneficiary's primary caregiver. An application is made through the promoter of the RESP, which is often a bank, mutual fund company or group RESP provider.

Canada Learning Bond

The Government of Canada also provides a

Canada Learning Bond The Canada Learning Bond (french: Bon d'études canadien, CLB) is a grant paid by the government of Canada to assist low-income families with saving money for their children's post-secondary education. The CLB relies primarily on the National Chil ...

(CLB) to encourage low-income families to contribute to an RESP. Families with children born on or after January 1, 2004, and who receive the National Child Benefit, will receive an additional $500 CLB when they open an RESP and $100 for each year they remain eligible.

Provincial grants

Alberta Centennial Education Savings Grant

The Alberta Centennial Education Savings (ACES) grant was introduced in 2005 by the

Alberta Alberta ( ) is one of the thirteen provinces and territories of Canada. It is part of Western Canada and is one of the three prairie provinces. Alberta is bordered by British Columbia to the west, Saskatchewan to the east, the Northwest Ter ...

government to encourage families to begin planning and saving for their children's post-secondary education. The government of Alberta contributes $500 to an RESP for babies born to or adopted by Alberta residents on or after January 1, 2005. The Alberta government then contributes a $100 Alberta Centennial Education Savings Grant to students who are enrolled in school in Alberta, and have turned the age of 8, 11, or 14 in 2005 or later. The provincial government announced in March 2013 that the program would be phased out, but did not provide a final date. The provincial government announced, in March 2015, that the plan is closing in 2015/16 fiscal year. Applicants will no longer be accepted by RESP providers and promoters on or after July 31, 2015.

Saskatchewan Advantage Grant for Education Savings

The government of

Saskatchewan Saskatchewan ( ; ) is a Provinces and territories of Canada, province in Western Canada, western Canada, bordered on the west by Alberta, on the north by the Northwest Territories, on the east by Manitoba, to the northeast by Nunavut, and on t ...

has announced the Saskatchewan Advantage Grant for Education Savings (SAGES) to benefit children in the province. The legislation was to be implemented in 2013.

Québec Education Savings Incentive

The Québec Education Savings Incentive (QESI) was launched in February 2007 and is a tax measure that encourages Québec families to start saving early for the education of their children and grandchildren. Universitas Financial commissioned a financial study in 2006 recommending the creation of an education savings incentive in Quebec and gave a number of presentations for this purpose to the provincial government. Each year,

Revenu Québec Revenu Québec (formerly the Ministère du Revenu du Québec nglish: Quebec Ministry of Revenue is the department of the government of the Province of Quebec, Canada that: *sees to the collection of income tax and consumption taxes, while ensuri ...

can contribute an amount equal to 10% of the net contributions paid into an RESP over the course of a year, up to a maximum of $250.

Early withdrawals

Any principal contributed to the RESP can be withdrawn at any time by its contributor. In this case, any eligible CESG payments on those contributions must be repaid to the Government. If the beneficiary has also received additional CESG, none of the beneficiaries in the plan will be eligible for additional CESG for the next two years. If the student elects to not attend a post-secondary institution, any accumulated interest may be withdrawn by the contributor; this is called an AIP (Accumulated Income payment). To receive this AIP, the plan must be in place for at least 10 years and all beneficiaries must be over 21 years old. This AIP is taxed as income unless it is rolled into a registered retirement savings plan ( RRSP), subject to individual contribution limits and applicable rules.

Group plans

In group RESPs (otherwise known as Group Scholarship RESPs), individual contributions are pooled with those of other contributors. Contributions to the plan are made according to a set schedule for the duration of the RESP contract. In a pooled group plan, the interest that is left behind from cancelled RESPs gets paid out with the matured plans. This excess "interest" is also called attrition.

References

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External links

Canlearn.ca: Education Savings For Your Child

HRSDC- Canada Education Savings Program

Financial Consumer Agency of Canada
Tax-advantaged savings plans in Canada Education finance in Canada