Your finances | Navigating RESPs

If it only takes a phone call to open a registered education savings plan, what exactly happens when it’s time to get the money out? Who should be contacted, who owns the funds, what is lost if the child does not pursue post-secondary education, what is the best disbursement strategy? We asked two experts to guide us.

Let’s set the table first. What is a registered education savings plan?

It is a savings vehicle that allows you to put money aside for the post-secondary education of a child, the “beneficiary”, who must be a Canadian resident. Anyone can open an individual RESP account for a child at a financial institution; you must be a parent or grandparent for a family RESP. An RESP has a lifespan of 35 years, the contribution limit is $50,000 for life per child. Eligible investments are similar to RRSPs and TFSAs.

Contributions are not tax deductible. But the undeniable advantage of an RESP is that it gives access to government subsidies. The terms are complex. The basic federal grant, called the Canada Education Savings Grant (CESG), is 20%, up to a maximum of $500 per year. At the provincial level, it’s exactly half: 10% and a maximum of $250 per year. We therefore receive the maximum grant with an annual contribution of $2,500, with a lifetime limit of $7,200 and $3,600. Low-income families are entitled to additional assistance.

Contributions and grants are placed in the RESP and provide a return. This only becomes taxable when the funds have left the plan, or “disbursed”.

What are the different types of RESPs?

There are three types of RESP. The individual RESP is the simplest: one child beneficiary, no obligation on the identity of the subscribers, a single account in which contributions, grants and returns accumulate, disbursement possible as soon as he or she is enrolled in post-secondary studies .

In the family RESP, the subscriber must have a blood relationship with the beneficiary children. Grant and contribution limits remain the same per child, but beneficiaries under 21 may be removed or added along the way. The advantage is the management of a single account for several children.

The group RESP is a complex tool offered by group plan brokers. Essentially, parents agree to regular payments that grant them shares in a fund. They must pay administration fees and penalties if they leave the fund.

What is the best vehicle?

The two experts consulted by The Press agree: their preference is for the individual RESP. “There is nothing simpler,” summarizes Mr. Martineau. It’s the only one where you can have someone other than the parent open it. »

Antoine Auger, financial planner at IG Wealth Management, clarifies from the outset that he does not offer group RESPs, which have experienced their share of controversies over the past ten years. “I’m never going to say that a diet is bad, but you have to understand how it works. People didn’t understand that they were committing to paying a certain amount until the end, it’s up to the company to explain that. » While he recognizes that the family RESP offers the advantage of a single account when you have several children, he does not see any real advantage for the transfer of funds between beneficiaries, which is also possible between individual RESPs.

What exactly happens when my child enrolls in post-secondary education?

First, with proof of eligible registration – in a vocational training center, CEGEP or university – you contact the financial institution where your RESP was opened. The first step is to identify an account – usually that of the subscriber parents – where money transfers can be made.

This is where the RESP is divided into two portions: contributions or “capital”, on one side, and grants and all investment income, on the other. The contributions belong 100% to the subscribers, generally the parents, who can withdraw them as they wish or let them grow in the RESP, which has a lifespan of 35 years.

“It’s your money, you worked hard for 16 or 17 years to put it aside,” recalls Mr. Martineau.

Is it better to use this capital for your child’s studies? Or renovate your kitchen, buy a car or pay for some trips? Technically, both paths are possible, but we feel that our two experts prefer the first. “Parents come in all styles,” notes Mr. Martineau. Are we renovating our kitchen? No, in my opinion. Do we put it aside? Yes. When your child comes with bills, you can pay, you know you have money for it. »

And the other portion?

This one, called Educational Assistance Payments or EAP, is more difficult to manage. First, because withdrawals from the RESP to the designated account are taxable and are added to the income of the beneficiary child. These withdrawals cannot exceed $8,000 (or $4,000 for part-time studies) during the first 13 weeks of postsecondary studies. The rest of the PAE is then fully available, always with proof of registration, and withdrawals can be made up to six months after the end of the study program.

“At this age, generally, young people have little taxable income,” recalls Antoine Auger. For the year 2023, a student can earn up to $15,000 without paying tax.

The funds available for EAPs belong to the subscribers, who decide at what rate they transfer them to the child. Theoretically, they can’t do what they want with it. The Canada Revenue Agency is clear on this subject: the financial institution must estimate “reasonable” expenses and can even request receipts for “authorized educational expenses”.

In reality, these checks are very rare, if not non-existent. If we exclude the moral dilemma, a parent could therefore decide without much risk to use this EAP portion for their own needs. “I have never heard of a professional asking for copies of invoices,” agrees Mr. Auger. But the law is clear. Well, it’s like driving 110 km/h on the highway…” “I’ve never heard of a parent being caught,” adds Mr. Martineau.

What happens if my child does not pursue post-secondary education?

First, the RESP has a lifespan of 35 years, so there is no rush to close it. If the RESP must be closed, the government grants must be repaid. However, it is possible under certain conditions to change the beneficiary, and the subsidies can then be kept.

For returns, one can claim an “accumulated income payment”: these are added to the parent’s income, who must also pay an additional 20% withholding tax.

What is the best method to “disburse” an RESP?

For obvious tax reasons, it is better to gradually disburse the PAE, that is to say, transfer the funds little by little to your current account, so that the beneficiary does not pay tax. Also remember that the amounts in the RESP continue to grow tax-free, even the capital portion.

One thing is certain, “it must be the parent who manages, unless the child is independent, is over 25 years old for example,” believes Mr. Martineau.

It could make sense to disburse the PAE more quickly if, for example, you know that your child will not go to university after CEGEP. Again, we have six months after the end of the study program to empty this fund.