How the RESP Works: An Essential Guide for Parents (2022)

You are worried about it, aren’t you?  

Saving for your child’s post-secondary education isn’t easy, with costs rising all around you.  

According to Knowledge First Financial, the average post-secondary tuition in Canada in 2037 for a four-year program will be an astounding $62,500.  And that’s without accommodation.  The number rockets to $127,000 if your child pays for housing.      

That’s a lot of money.

According to Employment and Social Development Canada (EDSC), the average RESP contribution was $1,675 in 2020 for 3 million beneficiaries, and the average withdrawal was $9,375 for 446,461 students.

In 2020, Statistics Canada conducted a Survey of Approaches to Educational Planning (SAEP) and they made a handy summary of the results.

Some highlights were:

  • 69% of children have some savings set aside for their post-secondary education. That’s great, but that means 31% of children don’t have any post-secondary studies to draw on.
  • The vast majority (85%) of post-secondary savings are sitting in RESP accounts while 31% are sitting in a child’s bank or trust account.
  • At the end of 2019, the average RESP value was $14,520.

The good news is that even if you have not yet started contributing to your child’s RESP, you can still make a difference by starting today. The first step is to understand how the RESP works.

What is a Registered Education Savings Plan (RESP)?

A Registered Education Savings Plan (RESP) is a registered account that helps a child save for their future post-secondary education costs. 

A major benefit of an RESP is that any income (interest, capital gains or dividends) earned is tax-sheltered.  That means investments can grow tax-free within the account.  This is similar to the TFSA and RRSP. 

If your investments are in a non-registered account, any income you make would be taxed.  Since you don’t pay taxes on income when it’s in your child’s RESP, the money can grow faster than it would in a non-registered account.

The second major benefit of an RESP is that when you contribute, you qualify for at least one government grant.   

What can you use an RESP for?

The obvious education costs that an RESP can pay for are tuition and books.  However, you could also use the RESP to pay for:

  • Transportation to school (car, bus passes)
  • Rent
  • Home furnishings
  • Meal plans or food
  • Laptop

Anything that you can legitimately use for education purposes would qualify.  Keep your receipts just in case the Canada Revenue Agency (CRA) has questions. 

What can I put in an RESP?

Despite the name, you should use your RESP as an investment account and not a savings or cash account.  You will not get very far by putting your money into an RESP and earning less than 1% a year. 

You can hold different investments within your RESP, such as

  • Stocks
  • ETFs
  • Mutual Funds
  • GICs
  • Bonds
  • REITs

Although it won’t grow very much, you can hold cash in an RESP as well just to receive the government match (more on that later). 

How to Open an RESP

The first thing needed to open an RESP account is a beneficiary.

A beneficiary, who is the future student, must meet two requirements at the time funds are contributed to an RESP.

They must:

  • Be a Canadian resident.
  • Have a Social Insurance Number (SIN).    

The person who opens an RESP could be one parent, both parents, an uncle, an aunt, a family friend, or even the neighbour’s gardener.  

You should try to open up an RESP account for your child soon after they are born. This will give your investments a longer time horizon.  Over that long duration, compound interest can grow your contributions to a significant five figure sum. 

How Does an RESP Work?

As previously mentioned, an RESP consists of at least one subscriber (typically a parent who opens the account) and a beneficiary.

As a subscriber or contributor, you make contributions to a child’s RESP.  The contributions and investments grow tax-free.  

When the time comes for a withdrawal of RESP funds, the investment gains/interest/income earned is taxed in the student’s name.  Since a student rarely earns a lot of money, and they would have tuition credits to use, the taxes paid should be minimal.     

Technically, an RESP is a contract between at least one subscriber and a promoter.  The promoter (in most cases, this would be a bank or mutual fund company) will pay out the RESP funds to the listed beneficiaries to help finance their post-secondary education.

You can contribute to an RESP for 31 years after you open it.  You have until the completion of the 35th year after the plan was opened to use the funds before the RESP terminates. 

RESP Contribution Limit

The maximum contribution amount over the lifetime of an RESP is $50,000.  If you decide to contribute even $1 dollar more, then you will pay a penalty of 1% per month for every contribution dollar that you put in over that $50,000 limit.

After-tax dollars fund your RESP, and there are no tax deductions on contributions made.

Unlike an RRSP or TFSA, there is no annual contribution maximum.  You could, theoretically, deposit $50,000 in your child’s first year on earth and let time and compound interest do the rest.  

If you do that, however, you will miss out on one enormous benefit, the Canada Education Savings Grant (CESG).  

The Canada Education Savings Grant (CESG)

In any year, the government will give you a 20% RESP match up to a maximum amount of $500.  This RESP match is known as the CESG. 

By contributing $2,500 in a year, the government will give you the maximum CESG grant of $500 ($2,500 * 20% = $500).  That is why one of the more popular strategies is to aim to contribute $2,500 a year. 

Pretty cool, huh? 

You deposit $2,500 into the account and within 4-8 weeks, the government adds $500 to your contribution amount.

Back to the earlier strategy of putting in the full life maximum contribution amount of $50,000 in year one of the RESP.  You can do that, but you would only get one CESG match for the maximum yearly limit of $500.

This would equate to a 1% match on the $50,000.  However, you would have more time to let the whole $50,000 compound in the RESP account.

Many people would rather contribute smaller yearly amounts and keep receiving the free 20% yearly CESG match. 

Many people do not have $50,000 lying around to invest, and if they do, they would probably put it towards their own TFSA or RRSP accounts, rather than tying it up for education use only. 

If you receive $500 in CESG a year, you would need to contribute $2,500 each year into an RESP for a little over 14 years to receive the maximum in CESG matches. 

Here are some other RESP rules and guidelines:

  • There are no income restrictions to qualify for the CESG. 
  • You do not have to contribute $2,500 in a year to activate the $500 CESG match.  You can contribute $100 and you would get a $20 match, or “bump” in your beneficiary’s RESP account.
  • The maximum lifetime CESG amount is $7,200.
  • If you contribute approximately $36,000 into your RESP account, your child receives $7,200 in CESG matching.  Sounds like a pretty good deal, no?
  • The CESG you receive for your child’s RESP is not counted towards your $50,000 contribution limit.  A contribution counts only when a subscriber deposits money into the RESP. 
  • On top of the basic CESG amount, low-income households that have an adjusted 2022 income of $50,197 or less can receive additional grants. 

    If a low-income household subscriber makes a $500 RESP contribution, then their child would receive a $200 CESG grant, which is a $100 bonus for the first $500 worth of contribution. This would equate to a 40% match on that first $500 of contributions. 

    If the household contributed anything more than that amount, the match would go back to 20%. 

Clearly, the CESG is a tremendous bonus for all Canadian families who invest in an RESP.

There is one huge caution to all this free money.  If a beneficiary does not enroll in post-secondary education, the CESG portion of the RESP must be returned to the government. 

CESG Grant Room (Carry Forward)

There is one case where you can contribute more than $2,500 in a year and claim double the CESG grants in a single year ($1,000 instead of $500). 

If you do not contribute to the RESP in a year, you can “catch up” in the next year and contribute $5,000 and receive a $1,000 CESG grant.  You can only do this one year at a time. 

CESG grant room (unused CESG amounts from previous years) accumulates until December 31st of the year the child turns 17.   After that, the government will stop matching your contributions.

The Canada Learning Bond (CLB)

There is a lesser-known, but very important grant that is also offered to eligible Canadians. The Canada Learning Bond (CLB) adds up to $2,000 in RESP incentives for low-income families, beginning with an initial $500 to any beneficiary born from 2004 onwards. 

This bond also makes a payment of $100 for each year of beneficiary eligibility, up to the age of 15.  

Provincial Education Savings Programs

In the provinces of British Columbia (BCTESG), Saskatchewan (SAGES) and Quebec (QESI) there are education savings programs that provide incentives to open an RESP. 

Types of RESPs

There are three types of RESPs and they are the Individual Plan, the Family Plan and the Group Plan

1. Individual Plan: These are RESP accounts with only one beneficiary (1 child).  Anyone can open this type of account, such as parents, siblings, aunts or uncles, etc.  There does not have to be a blood relation.

You can contribute to these plans any time you like.   

You can also choose how you want to invest in this type of plan, whether it be stocks, bonds, ETFs, mutual funds, Guaranteed Investment Certificates (GICs), or cash.  The maximum amount of contributions for this type of RESP is $50,000.

2. Family Plan: A family plan has one or more beneficiaries, but they must be related (blood related or adopted) to the subscriber (the contributor).  Thus, only a parent, grandparent or sibling can open this type of account.

You can hold the same types of investments that you can hold in an individual plan as well.  If the family plan has two or more children registered as beneficiaries, then you must track the contributions for each child.  You do not have to contribute the same amount for each child. 

The maximum amount of contributions is again $50,000 per child. If you have three children, the maximum amount of contributions is $150,000 in total.  If you are adding a beneficiary to a family plan, then they need to be under the age of 21. 

3. Group Plans: There is only one child who is the beneficiary, and these types of plans can only be accessed through scholarship plan dealers.  Unlike the first two types of plans, you have very little control over your investments and they typically have higher investment fees, leaving you with less money from the get-go. 

You should do your own due diligence with these types of RESPs and please think twice before using this type of plan.

RESP Contribution Considerations

Once the time gets closer to your child attending post-secondary school, then you could choose to invest more conservatively if your portfolio has a heavier equities weighting (70% or more).    

Look to hold cash or increase your allocation in bonds if you do not have extra savings outside of your RESP. 

If there is a 50% crash in the stock market crash right before your child needs the money for schooling, you could see your RESP value drop from $80,000 to $40,000 really quickly. 

If that thought scares you, you can choose to move at least one or two years’ worth of education expenses into a high-interest savings account a couple of years before you expect your child to attend college, university or any other qualifying program. 

There is an ongoing debate about whether you should invest so heavily into one specific cause.  On the one hand, Canadian post-secondary education is getting more expensive each year.  So investing a lot into an RESP makes sense. 

The government is also offering you the opportunity to receive up to $7,200 in CESG benefits if you make $36,000 worth of contributions over 15 years.    

After that point, you may consider it more beneficial to contribute to your own RRSP or TFSA.  The TFSA in particular gives you the same tax-free growth as the RESP without having to pay any withdrawal taxes on investment income earned. 

RESP Over Contribution Example

Just like the TFSA and RRSP, it is possible to over contribute in an RESP account.  An RESP has a lifetime contribution limit of $50,000.  If you exceed that amount, you will owe 1% per month on the excess balance until you take it out from the RESP account. 

Suppose you and your spouse have contributed $40,000 to your child’s RESP through the first 10 years. In year 11, you win a scratch lottery ticket in the amount of $25,000. 

You decide to put $15,000 into the RESP account in July.  The latest contribution amount made the lifetime contribution $55,000.  Therefore, you have exceeded the lifetime contribution amount by $5,000 ($55,000 in contributions–the $50,000 lifetime limit). 

From July to December of that year, you would have had to pay an excess tax of $50 per month ($5,000 * 1%).  These taxes would continue until the over-contribution amount was withdrawn.   

How RESPs Work For You

RESP Qualified Programs

A RESP can help cover the costs associated with attending classes at most major universities and colleges in Canada, provided it can be found on this list of qualified (designated) educational institutions

However, your child’s RESP can also cover educational costs for other accredited programs and trade schools.  Your child may still qualify even if they attend an American post-secondary institution. 

Some qualifying programs only need to last 3 consecutive weeks, with a minimum of 10 hours of classroom time per week. 

You need to provide proof of enrollment to the financial institution that is in charge of your child’s RESP. 

RESP Withdrawal Rules

The day has finally arrived; your child is heading off to receive that all-important post-secondary education.  The entire RESP balance that has been built up can be used to pay for their education costs.

There are two ways to make RESP withdrawals and you need to detail which portion of funds you want to access for the withdrawal.   You need to think of withdrawals as two separate buckets or pots.

1. The original contributions are paid out tax-free and the RESP subscriber makes the withdrawal request(s).   Either the subscriber or the beneficiary can receive the money.  This type of withdrawal is known as a Post-Secondary Education Withdrawal (PSE Withdrawal).

There is no maximum amount for PSE withdrawals made by the subscriber.  A subscriber can withdraw the money and technically do whatever they wanted to do with the money. 

2.The portion of the funds from investment gains and any government RESP grants (CESG, Canada Learning Bond, Provincial grants) are made to the beneficiary only and taxed in the student’s name as income. 

These payments are known as Education Assistance Payments (EAP).  Once again, the subscriber(s) are the people who make the withdrawal request.

EAPs are made by the promoter (i.e. bank – the place that opened up your RESP account) and paid to the beneficiary (student).

Withdrawals received by the student are added to their taxable income in the same way that the salary from your job is added to your taxable income for the year. 

The promoter will report the EAP amount on a T4A for a student to claim as income tax.

Students typically have a lower income at this point in their lives than their parents, so right away the taxes paid out should be lower.  Students also get tuition tax credits, which will hopefully push all the taxes they owe very close to $0. 

EAP Limits

For any RESP opened after 1998, there is a maximum EAP amount that is made to a student in order to cover their education costs, at least initially.  

That amount is $5,000 for a qualified educational program–to help pay for the first 13 consecutive weeks of education. 

After that time, there is no limit on the amount of EAPs that the student can receive if the student continues to qualify for them. 

For part-time studies, the limit is $2,500 for the 13-week period.       

Remember, you can withdraw any value of money from your contribution (PSE) amount at any time tax-free. 

If your child needs $10,000 to pay for tuition, textbooks, and on-campus residence and they can only receive $5,000 for the first 13 weeks of school through their EAP withdrawals, you can also take an extra $5,000 out of the contribution from the PSE bucket of your RESP. 

Which portion of RESP Withdrawals are Designated as PSE or EAP?

PSE  EAP
Source of FundsOriginal contribution amountsGovernment grants (CESG, CLB and provincial education incentive amounts) and income or gains made on contribution amounts
Who makes the withdrawal request?Subscriber onlySubscriber only
Who receives the withdrawal?Subscriber or beneficiaryBeneficiary only
What is needed to withdraw the moneyEnrollment proof for a designated post-secondary institution, or vocational programEnrollment proof for a designated post-secondary institution, or vocational program
When can you withdraw?AnytimeOnce the student starts their post-secondary education  studies
Taxes on withdrawal while the child is still in school?None, as the original contributions were made with after-tax dollarsYes, taxed in the student’s name (should be a low tax rate). 
Withdrawal limitNone$5,000 for the first 13 weeks of the semester

Tips for Withdrawing RESP Funds

Post-secondary institutions want their money a few months in advance.  Don’t think that you have until the first day of classes to make the payment.  Delaying payment could mean a lost spot in the program or a late payment charge.

Have your RESP money ready to transfer in cash to the educational institution, so sell any ETFs, stocks or bonds ahead of time.  

Here are some other tips:

  • Become familiar with the limits you can take out of each type of bucket you have in your child’s RESP. You can take out an unlimited amount of your own contributions (PSE portion), but for a full-time program, you can only take $5,000 out of the EAP portion in the first 13 weeks.
  • Make sure your child has a bank account, as that is where the EAP money is transferred to.
  • You will have to fill out an RESP withdrawal form stating which bucket of funds you want to use to fund your child’s educational payments from the RESP account. 
  • Make sure you have all your subscriber information and your beneficiary’s information, too. This includes the beneficiary’s SIN and proof of enrollment.

RESP Tracking Tip

For tracking, you need to track the three separate components that make up your child’s RESP:

  • Contributions you made into the RESP.
  • Government grants you received. 
  • Investment interest, capital gains or dividends received.

Either your financial advisor or you yourself will have to track the contributions and withdrawals. 

The reason you should do this is that if your child completes their education, you will eventually close the account.  When there is unused money in an RESP, it is taxed differently depending on which of the three components you have left. 

The Importance of RESP Withdrawal Strategies 

It is important to have an RESP withdrawal strategy or you will end up giving back CESG money to the government. 

You may find it advantageous to use as much of the EAP portion of your RESP account as early as possible in your child’s post-secondary career. 

The reason is that there are harsher withdrawals rules if your child completes their education and you have unused EAP amounts left in your child’s RESP rather than PSE amounts. 

What Happens to Unused Amounts in an RESP?

If your child does not end up using all their RESP money for their post-secondary studies, you can:

  • Leave the amount in the account until they turn 36, just in case they change their mind later on in life and want to attend school again (or for the first time).
  • If you have an individual plan for two or more children, you can transfer the amount from one beneficiary to another beneficiary.  
  • If you have a family plan, you can use the funds for another named beneficiary within the family plan.  The sibling needs to be under 21 in this case.  
  • You can transfer the accumulated income amount (from investment income and gains, up to a maximum of $50,000) tax-free to your RRSP if you have contribution room available.  The downside is that you won’t be able to claim these amounts as a tax deduction.
  • You can close the RESP account.  Once that happens, you can:
    • Withdraw your contributions tax-free (PSE withdrawals portion of the RESP)
    • Return the CESG and CLB amounts you received, back to the government. These benefits can only be used for education (part of the EAP portion of the RESP)
    • Include investment gains (interest, dividends, capital gains) as taxable income for yourself and your spouse (if applicable).  This amount will be taxed at you or your spouse’s marginal tax rate plus an additional 20%. 

      The extra 20% tax penalty is called an Accumulated Income Payment (AIP).  In order for an AIP to occur, the RESP needs to be at least 10 years old, or the beneficiary must be 21 and ineligible for an EAP.

Therefore it is important to spend your EAP portion of the RESP funds first, rather than the portion from your own contributions.

The promoter (bank, credit union, mutual fund company etc.) can return your RESP contributions to you tax-free and you do not have to include these payments as income on your income tax return. 

After all, the contributions were made with after-tax money, which means the government already taxed you on the original money. 

The promoter can also make the contribution payments to the beneficiary for non-school use.

RESP Guide Conclusion

Now that you know the ways that the RESP works, you can start saving and investing for your child’s future post-secondary costs. Remember that your contributions can always be withdrawn tax-free, but any government incentives and investment gains will be subject to varying rules.

What types of RESP investments have you made for your child(ren)? Are you sticking with market based index ETFs? Do you have a fixed-income component? Are you using dividend paying stocks? Let us know in the comment section below.

RESP Guide FAQs

How do I maximize my RESP contributions?

To earn the most from your RESP deposits, you need to contribute $2,500 per year ($208.33 per month) into your child’s RESP to receive the $500 annual grant from the government.

What happens to unused RESP?

There are many things you can do with unused portions of your RESP. 1. You can leave the amount in the account until the beneficiary turns 36, in case they want to attend school in the future. 2. You can transefer it to another beneficiary (in an individual or family plan). 3. You can transfer up to $50,000 of investment gains and income tax-free to your RRSP if you have the available contribution room.

What is the RESP limit for 2022?

There is no RESP contribution limit for any year, 2022 included. There is only a lifetime RESP contribution limit of $50,000 per beneficiary. You could deposit $50,000 into your child’s RESP immediately if you wanted to, but you would only receive one year’s CESG grant. To maximize your RESP grants, you should aim to contribute $2,500 per year for 14 years and $1,000 in the fifteenth year, because the CESG lifetime maximum is $7,200.

Related Articles

Here are some important investing articles to check out.

Leave a Comment