Introduction
School after high school costs a lot of money in Canada. Tuition is the fee you pay to your school. Books, rent, and food cost money too. An RESP is a tool that helps parents save for those costs. You save a little at a time, and the government adds free money to your savings. This guide explains it in simple words.
What It Is
RESP means Registered Education Savings Plan. It is a special account at a bank or another place that holds money. Registered means the government knows about the account and has set rules for it. You open an RESP to save for a child’s school after high school. The child is called the beneficiary. A beneficiary is the person the money is saved for. The person who opens the plan is usually a parent or a grandparent.
The money can pay for a college, a university, a trade school, a CEGEP, or an apprenticeship program. An apprenticeship is a program where you learn a trade by working and studying.
The best part is the free money from the government. The main grant is called the Canada Education Savings Grant, or CESG. A grant is money you do not pay back. There is also a second kind of help called the Canada Learning Bond, or CLB.
How It Works
First, you open an RESP at a bank or a credit union. The child needs a Social Insurance Number, or SIN, to get the grants. A SIN is a nine-digit number the government gives to each person in Canada.
Then you put money in. The money you put in is called a contribution. There is no limit on how much you can put in during one year. But there is a lifetime limit of $50,000 per child, counting all RESPs for that child. If you go over $50,000, the extra money is taxed at 1% each month until you take it out.
Now comes the free money. The CESG adds 20% of the first $2,500 you put in each year, up to $500 a year for each child. The most CESG one child can get in their whole life is $7,200. Lower-income families can get up to $100 more a year. The CESG stops at the end of the year the child turns 17. If you miss a year, you can catch up by putting in up to $5,000 in one year.
The Canada Learning Bond is different. It is for children from lower-income families. The government puts in up to $2,000 per child, and you do not have to put in any money at all to get it. The first year brings $500, and each extra year brings $100 more, up to the year the child turns 15. The child must be born on or after January 1, 2004, live in Canada, and have a SIN.
Your money can also grow inside the plan. The growth is not taxed while it stays in the plan. Tax is money you pay to the government from what you earn. You pay it later, when the money comes out. You can keep adding money for up to 31 years.
An Example With Numbers
Meet Priya and her son Aarav. Each year, Priya puts in $2,500. Each year, the government adds $500 of CESG. After one year, the plan has $3,000 before any growth.
Priya keeps doing this for 10 years. She puts in $25,000 in total. The government adds $5,000 in total. So the plan has $30,000 before any growth. After 10 years, Priya still has $2,200 of CESG room left, and $25,000 of contribution room left.
Now think about a smaller start. Say a family puts in $100 a month, or $1,200 a year. The grant is $240 a year. Over 10 years, that is $2,400 of free grant money.
How the Money Comes Out
When the child starts school, the money comes out in two kinds of payments. The first kind is called an Educational Assistance Payment, or EAP. An EAP is made of the government grants and the growth inside the plan. It is taxed in the student’s hands, so the student reports it as income on their tax return. Most students pay little or no tax on it. In the first 13 weeks of full-time school, EAPs are capped at $8,000. After that, there is no limit.
The second kind is a return of your own contributions. The money you put in comes back tax-free, because you already paid tax on it when you earned it.
What if the child does not go to school after high school? The grants must go back to the government. Your own contributions still come back to you tax-free. The growth can be taken out, but it is taxed in your hands plus an extra 20% penalty tax. A better choice is often to move the growth to your RRSP, if you have room. An RRSP is a long-term saving account for retirement. Learn more in our guide What Is an RRSP and How Is It Different From a TFSA?.
Common Mistakes
One big mistake is to wait too long to open an RESP. The CESG only starts when the plan is open, and you can only catch up one missed year at a time. A second mistake is to put in more than the $50,000 lifetime limit. The extra money is taxed at 1% each month. A third mistake is to forget the SIN. Without it, the government cannot pay the grants. A fourth mistake is to forget the CLB. Many lower-income families never open an RESP, so they never get the up to $2,000 of free bond money. A fifth mistake is to take money out for the wrong reason before school starts. Some grant money may have to go back.
Final Thoughts
An RESP is one of the best deals in Canada for families with children. You save a little at a time, the government adds 20% on the first $2,500 each year, and lower-income families can get up to $2,000 more from the Canada Learning Bond. Start early, even with a small amount. For money you may need soon, read our guide on how much cash a student should keep for a rainy day.
Quick Questions
What is an RESP in simple words?
An RESP is a savings plan for a child’s school after high school. You put money in, and the government adds free money on top.
How much free money does the government add to an RESP?
The CESG adds 20% of the first $2,500 you put in each year, up to $500 a year and $7,200 per child. Lower-income families can also get up to $2,000 from the Canada Learning Bond, with no contribution needed.
What happens if my child does not go to school after high school?
Your contributions come back tax-free. The grants go back to the government, and the growth is taxed with a penalty unless you move it to an RRSP.
Disclaimer: This article is for educational and informational purposes only and does not constitute financial advice.
Sources: Government of Canada, Registered Education Savings Plans and related benefits — https://www.canada.ca/en/employment-social-development/services/learning-bond.html ; Canada Revenue Agency, Registered Education Savings Plans (RESPs) — https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps.html