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Registered Education Savings Plans are savings accounts for future post-secondary education costs that can grow on a tax-deferred basis for up to 25 years. You can contribute annually with a lifetime ceiling of $50,000 per beneficiary.

The federal government wants to encourage families to save for their children’s education, so it offers an incentive. Opening an RESP makes you eligible to receive the Canada Education Savings Grant to top up your contributions by 20 to 40%, based on family income, on the first $2,000 of annual contributions.

 The earnings on RESP contributions and on the Canada Education Savings Grant are taxed upon withdrawal in the hands of the beneficiary. Since most students have little or no income, the RESP withdrawals do not create a tax burden for them.

 If the beneficiary does not go to university, the contributor can transfer $50,000 of the balance in the RESP account to an RRSP. What is the downside? If the contributor has insufficient RRSP contribution room the remainder must be withdrawn and the accumulated growth in the account will be taxed as income. Also, the contributor will have to repay all of the Canada Education Savings Grants received.

One thing to bear in mind is that contributions to a RESP are not tax deductible. RESPs differ from RRSPs in that contributions do not reduce taxable income. The main advantages of RESPs are tax-sheltered earnings, the grant from the federal government and a disciplined approach to saving.


About the Author

Imagine if Canadians were known for being all over their money. Engaged. Proactive. Getting out of debt. Savvy. Saving. Generous. Nancy wants to help. Nancy started her own journey with money over 15 years ago, and formed her company “Your Money by Design” in 2004 to help others along the same path. It’s not the usual financial advising/investment stuff. It’s about taking control of day-to-day finances –managing monthly cashflow effectively, spending appropriately, getting out of debt, saving. If you're ready to take control over your finances, pop by her business site, YourMoneybyDesign.com

Ask an Accountant: How do RESPs work? Comment

  1. Traciatim

    I would add to this that anyone why is investing ‘mere mortal’ sums of money to stay far far away from pooled or group RESP solutions that charge fees by the unit of investment purchased. I consider myself suckered in to signing up to CST when my daughter was born 6 years ago. My son is only 3 and is already catching up to the CST ‘investment’ in available funds.


    Oct 12, 2007

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