Make the most of your child's RESP with this year-end planning checklist

National Post


This week has been dubbed Education Savings Week, part of the federal government’s Financial Literacy Month initiative taking place during November. Acknowledging that the financial aspect of going to college or university “can be a burden and a source of stress for both students and parents,” the goal of the week is to alleviate this pressure “by helping parents, especially those with modest incomes, plan for their child’s future.”

Perhaps the best way to save for postsecondary education is via the registered education savings plan (RESP). These plans continue to be very popular among Canadians, according to the latest Employment and Social Development Canada’s Annual Statistical Review of RESPs.

There are a few RESP planning tips to consider before Dec. 31 to make sure you’re taking full advantage of this vehicle, but let’s review a few basics first.

An RESP is a tax-deferred savings plan that allows parents to contribute up to $50,000 per child toward saving for post-secondary education. The addition of government money in the form of Canada Education Savings Grants (CESGs) can add up to $7,200 per beneficiary to the plan.

The CESG consists of a basic CESG, which is available to families of all income levels, and an additional CESG for beneficiaries from low- and middle-income families. The basic CESG is equal to 20 per cent of the first $2,500 of contributions made into an RESP for each year, or up to the first $5,000 in contributions if sufficient CESG carry forward room exists from prior years.

Beneficiaries from low-income (family income up to $49,020 in 2021) or middle-income (more than $49,020 and up to $98,040) families may also qualify for the additional CESG, which is a payment of 10 per cent or 20 per cent on the first $500 of contributions made each year. CESGs are available up to the end of the calendar year in which the beneficiary turns 17.

Contributions you made to an RESP, which were not tax-deductible, can generally be withdrawn at any time, tax-free. (If not for education, however, CESGs may need to be repaid). Any other funds coming out of the plan for post-secondary education are referred to as “educational assistance payments” or EAPs. This includes the income, gains and CESGs in the RESP. These are taxable when paid out to the student, who may end up paying little or no tax based on the availability of various tax credits and whether they had other income (discussed further below).

According to the recent government review, $70 billion was invested in RESP assets as of Dec. 31, 2020. Last year, RESP subscribers contributed $5.2 billion to the plans and the government paid a little more than $1 billion in CESGs on behalf of three million beneficiaries. The average annual contribution per beneficiary last year was $1,657.

As for accessing the funds for education, a total of $3.9 billion was withdrawn from RESPs last year for nearly 420,000 beneficiaries, with the average withdrawal per student being $9,375. The total amount withdrawn in 2020 was down from the $4.4 billion taken out in 2019, which marked the first decrease in withdrawals since the program came into effect. This coincided with a drop in the number of students making withdrawals, which peaked at 466,203 students in 2019.

The report cites the COVID-19 pandemic for the likely drop in students’ financial needs — and, thus, RESP withdrawals — for 2020. For example, some post-secondary educational institutions closed last year, so some of the costs associated with in-person attendance, such as room and board costs, decreased. In addition, some students may have temporarily opted out of their program because of class cancellations and/or decided to wait for in-person classes to resume before re-enrolling.

In light of the data above, and with 2021 coming to a close, what can parents and students do before Dec. 31 to maximize RESP benefits this calendar year?

First, if your (grand)child turned 15 this year and has never been a beneficiary of an RESP, no CESG can be obtained in future years unless at least $2,000 is contributed to an RESP by year-end. Consider making your contribution by Dec. 31 to receive the current year’s CESG, and create CESG eligibility for 2022 and 2023.

More generally, given that the average RESP contribution in 2020 was only $1,657 per child, some parents are not contributing enough to get the maximum annual CESGs. If you can afford it, contributing at least $2,500 per child in 2021 will get you the full 20-per-cent CESG or $500 per child. If you’ve got CESG carry-forward room, doubling your contribution to $5,000 can yield $1,000 in CESGs per child in 2021.

On the withdrawal front, if your (grand)child is an RESP beneficiary and attended a post-secondary educational institution in 2021, consider having EAPs made from the RESPs before the end of the year. Although the amount of the EAP will be included in the student’s income for 2021, depending on the student’s other income, perhaps from part-time or summer employment, the EAP income will be effectively tax-free if the student has sufficient personal tax credits.\

For example, a student could withdraw a total of $20,500 in EAPs with no tax if they had no other income and claimed the 2021 enhanced federal basic personal amount (BPA) of approximately $13,800 and had undergrad Canadian tuition fees (averaging $6,700) eligible for the tuition tax credit. Alternatively, the student may only wish to take EAPs up to the federal BPA of $13,800 , allowing the tuition to be transferred to a (grand)parent or spouse or partner (up to the $5,000 maximum transfer limit).

Finally, if your (grand)child is an RESP beneficiary and stopped attending a post-secondary educational institution in 2021, EAPs can only be paid out for up to six months after the student has left the school. You may, therefore, wish to consider having final EAPs made from RESPs of which the student is a beneficiary — if it’s not already too late.