Paying for a child's post-secondary education is a great investment in your child?s future as Canadian tuition fees and other related education related expenses continue to climb. As a result, it is becoming more difficult for many Canadian families to fund the cost of post-secondary education, especially if there is more than one child. So Ottawa jumped in with a savings plan called Registered Education Savings Plan - RESP, to encourage parents to save money for their kid's post-secondary education.

What is RESP?

A RESP is a education savings account registered with Canada Revenue Agency (CRA), where an individual (subscriber) can save money for a student (beneficiary) and government pitches in by providing monetary grants (CESG, Additional CESG, CLB) and allow the money to grow TAX FREE until withdrawn to fund post-secondary education of the chosen beneficiary.

When funds are withdrawn from RESP to fund the post-secondary education, it gets taxed at the hands of student, which is next to negligible. RESP funds can be used to pay for the beneficiary's tuition, trade fees, registration fees, subscriptions for educational and research purposes, books, computer, supplies, housing and transportation.

CRA administers and applies the RESP rules provided under the Income Tax Act, defines the types of RESPs and provides the income-related information for primary caregiver so that eligibility for the government monetary grants (Additional CESG or CLB) can be determined.

Like every registered savings account, RESP also comes with tons of rules with respect to contribution limits, eligible federal grants, eligible investments, withdrawal and applicable tax implications. Many things have changed since the introduction of RESPs but with 2007 federal budget some rules have somewhat simplified.

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Few questions about RESP.

I noticed the maximum grant is $7200. It means we get the 20% grant on our $36000 contributions (we have to contribute within yearly limit).

There is life time limit for $50000. What does that mean? We will not get any grant for additional $14000. What are pros/cons of contributing additional $14000? How should we take maximum benefit of $14000 additional contribution?

Thanks in Advance.

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Success is Never Ending and Failure is Never Final.

Hi there,

First of all there is no yearly limit. If you have money you can contribute $50k in one shot but in that case you will get maximum yearly grant of $500 (or $600 depending upon you income) and no more grants after that as you cannot contribute more than $50k (not so smart choice, isn't it?)

That is why it is recommended that we should not contribute more than $2500.00 in a year so that we can get benefit of max. grants.

Secondly, you are right that you will not attract any CESG after contributing $36,000. So the biggest pro of contributing additional $14000 is have tax deferred growth until the money is kept in RESP and when money is withdrawn from RESP, your contributions are tax free and the growth will be taxed at the beneficiary's tax rate, which is almost negligible.

I do not anticipate any cons of contributing additional $14K to RESP because most likely your kid will need much more than $50K towards post-secondary education.

Please note that one must not contribute more than $50K in RESP as CRA will charge 1% penalty /month for any additional funds.

Hope this helps.

Thanks.

So, if someone has extra $14000 to invest then why not invest now in RESP to grow tax free. Considering he has maximized his TFSA.

Do you think we can withdraw this $14000 from RESP in case of emergency?

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Success is Never Ending and Failure is Never Final.

I lost the track of RESP contribution and I know there was the toll free number for ESDC (Service Canada) department who can give all detail information of contributions year by year if you provide the SIN number of child.

I can't find that phone number anymore. Any idea about it?

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Success is Never Ending and Failure is Never Final.

Hi there,

Once $36k are contributed in RESP it will not attract any grants. So yes, you can deposit balance of maximum allowed limit $14K to grow tax free.

Further, when you withdraw, as per CRA rules, your contributions will come back to you tax free but the grants equivalent to $14K contribution will be returned to CRA, because CRA does not recognise that this $14K was additional contribution above $36K. For them, if the money is withdrawn from RESP before kid goes to university, equivalent grant provided to date must also be returned.

Thanks

Hi there,

If you lost track of your contributions, I would suggest you call your RESP provider as they can accurately advise you of your contributions to date, CESG received to date and growth to date.

Thanks