RESP rules in Canada: What you need to know
Ensuring that your child has the funds they need for postsecondary and graduate education can be a big challenge. Through RESP, Canadian parents can make investments that their children can rely on for their future education. But while RESP is an essential tool for most Canadian parents, there are a firm set of rules that govern their implementation. It is important to know the basic rules about RESP in Canada and understand its limitations before you plan to start one.
What is an RESP, and why should I start one?
RESP stands for Registered Education Savings Plan. It allows you, the ‘subscriber,’ to contribute funds towards a savings account with a financial organization, the ‘promoter.’ The ‘beneficiary’ (your child) can withdraw these funds for education. The main benefit of starting an RESP account instead of a regular savings account is that the savings remain tax-sheltered in the RESP account.
Any amount you contribute to an RESP account is kept in place until your child withdraws the funds. However, since these funds are tax-sheltered, it means that you cannot include them in your yearly tax claims<.
The Canadian government also offers the Canada Education Savings Grant (CESG), matching 20% of the first $2,500 contributed annually towards an RESP. After which, you can get a maximum of $500 per beneficiary per year with a maximum lifetime amount of $7,200 until your child turns 18. This scheme allows you to save more money for your child’s education.
What are the RESP rules for withdrawal?
An RESP is a great way to support your child’s education, but it’s essential to be aware of the RESP rules in Canada when it comes to withdrawal. Here’s a quick overview of the general RESP rules for withdrawing:
- Only the subscriber (the parent) can withdraw money from the plan. The beneficiary (your child) cannot withdraw money by themselves.
- Before they withdraw the funds, the subscriber needs to provide proof of enrollment into a postsecondary institution, such as a college or university.
- You can only withdraw a maximum of $7200 for full-time studies and $3600 for part-time studies from the government portion of your contributions. If you draw a higher amount, it is considered a loan, and you will need to pay it back.
- You can withdraw a maximum of $5000 from the CESG portion of the funds during the first 13 weeks of schooling. After 13 weeks, this limit no longer exists.
- There’s also no limit on how much can be withdrawn from the subscriber’s contributions.
- You don’t have to pay taxes when withdrawing from the subscriber contribution. If you withdraw from the CESG portion, you will have to pay a tax on this amount.
Can parents withdraw from an RESP?
The RESP rules for withdrawal don’t limit parents when taking out funds from the account. The beneficiary (the child) cannot draw on these funds without the subscriber’s (the parent) consent. Parents can also withdraw their initial contribution without any taxes, which can be a great way to access extra funds in an emergency.
However, withdrawal for any reason outside of education is subject to the same rules as mentioned above. You’ll have to pay back any CESG amount added to the RESP account for a maximum of 20% of the withdrawn amount.
Is there a limit on contribution amounts for an RESP?
You can start an RESP account any time after your child’s birth, but you only have a maximum of 31 years after opening the RESP account to make contributions. Also, you can only contribute $50,000 over the life of the plan. If you exceed this amount, you will have to pay 1% tax per month on the extra amount.
There aren’t any limitations on the amount you can contribute per year towards an RESP. If you decide to postpone starting an RESP account until your child is older, you can make higher contributions in a shorter period. Although, if you open an RESP account late, you will not receive all the CESG contributions for the missed years in a lump sum. Instead, once you’ve made your initial $2,500 contribution for the current year, you can make another contribution up to $2,500.
You earn the maximum grant amount of $500 for one of your missed years. As an example, if you’ve missed five years of CESG, you will need to make a $5,000 contribution per year over the next five years to catch up.
What happens to the unused RESP money?
If your child does not use the money or only uses a fraction of it, the money isn’t lost! The rules state that a plan can stay open until the end of the year when your child turns 35. Even if they don’t pursue a postsecondary education right away, the funds will remain in place until they turn 35. You can also choose one of the following options depending on your promoter:
- Transfer the funds to another beneficiary
- Transfer the money to another RESP account
- Withdraw the funds
- Transfer the funds to a Registered Retirement Savings Plan (RRSP)
- Donate the funds
Starting an RESP is relatively risk-free since you will always have access to your contributions for the length of the plan, regardless of what your child decides to do upon graduating high school.
What if I didn’t start an RESP or started one too late?
RESP rules in Canada are designed to help parents steadily and easily save for their child’s educational future. The Canadian government offers a lot of flexibility to ensure that even if things don’t go as planned, you still benefit from the contributions you’ve made over the years. If you are unable to start saving for your child’s education, you can choose to turn your home equity into an education loan.
If you’re looking for an educational loan to supplement an RESP, look no further than Alpine Credits. Our team of experts can help you find the financing you need regardless of your age, credit history, or income.