A Registered Education Savings Plan (RESP) allows you to set aside money for your child’s post-secondary education. In addition to your contributions, the government also pays grants. Here’s how to get the most out of them.
The maximum RESP contribution limit is $50,000 per beneficiary. However, it is not the whole amount that will generate grants, but only the first $36,000.
“But nothing prevents you from contributing more, since the money grows tax-free. This can be an interesting strategy if you have cash to use,” explains Daniel Harissa, financial security advisor and vice-president of financial management at Waltr.
What are the different grants?
The Canada Education Savings Grant (CESG) is a 20% grant calculated on the amount contributed to the RESP. Regardless of family income, the basic CESG is 20% of the first $2,500 of contributions paid in the year, or a maximum of $500 per year. The lifetime ceiling is $7,200, specifies Daniel Harissa.
As for the provincial government, it pays the Quebec education savings incentive (IQEE), which represents the equivalent of 10% of the first $2,500 of contributions deposited in the RESP, i.e. a maximum of $250 per year, up to up to $3,600 for life.
Be aware that the subsidies can, however, be increased according to family income. If it is $50,197 or less for the federal government and $46,295 or less for the provincial government (year 2022). In these cases, the CESG will be doubled and will reach 40% for the first $500 contributed and the QESI, 20%, for a total of $150 more than the basic amounts per year per beneficiary.
For a family income between $50,198 and $100,392 at the federal level and $46,296 and $92,580 at the provincial level, the enhancement will reach 30% and 15% respectively, for a total of $75 more per year per beneficiary.
Why should one open an RESP, even with a low income?
Low-income families are eligible for the Canada Learning Bond (CLB), an amount of $500 paid the first year the RESP is opened, then $100 per year of eligibility thereafter, until ‘at the age of 15. “This means that all you have to do is open an RESP, and even without contributing a dollar, you can receive a maximum amount of $2,000 for life. When we add the yield, we obtain a pretty penny without costing us a penny”, underlines Daniel Harissa.
To be entitled to the BEC, the family income must currently be less than or equal to $50,197 for a family of one to three children, less than $56,636 for a family of four children and less than $63,101 for five. children.
Contribute once a year or all year?
Is it better to contribute monthly or contribute a larger amount only once a year? “For my part, I recommend a systematic contribution, with each pay, for example, by direct debit,” says Daniel Harissa.
He adds that by contributing on a regular basis, it also makes it possible to buy on the basis of the market average. “If we contribute only once a year and the market is down, we will lose. This is why the best thing to do is to contribute throughout the year”, indicates Daniel Harissa.
ADVICE
- An RESP has three components: the contributions that parents or others (grandparents, for example) have made, the government grants, and the return produced over time by these sums.
- This distinction is important, because their treatment will be different. Thus, these monies accumulate tax-free, but upon withdrawal, government grants and returns will be taxable in the hands of the beneficiary. Rest assured, because since he is a student, his tax rate will undoubtedly be relatively low, or even zero, if he has earned $15,000 or less (rate for the 2022 tax year).
- If the child does not go to post-secondary education, you will be able to recover the contributions you have made, but you will have to repay the grants to the government, unless your plan allows the RESP to be transferred to your other child and that child is under 21 years old.