We all want the best for our children, and part of that is preparing them for their future after high school. If you’re hoping for them to get post-secondary education, then you know that school/college/university costs money. A lot of money. Student loans are an option, possibly a necessity, and the interest on them is even tax-deductible. But there’s something even better, which can help release the financial burden when your kids are heading away to school:
Registered Education Savings Plans
I know, I know. Money is tight (money is always tight), but if you put money into an RESP, the government matches your contribution. The government GIVES YOU MONEY. Free money! From the government! THAT NEVER HAPPENS.
The money they contribute is called the Canada Education Savings Grant (CESG). There are limits to how much they will contribute, of course. The basic CESG is 20% of your contributions, to a maximum of $500 per year. that means that in order to get that $500 of FREE MONEY per year, you have to contribute $2,500. That sounds like a lot, I know. But if you break it down to monthly contributions, it’s $2,500 / 12 = $208.33. Cut out some dinners out with friends, bring your lunch to work instead of buying it, pay closer attention to sales and coupons, and you’ll be able to find that monthly contribution.
There are common questions about RESP’s, so let’s tackle them in a Q & A format.
Are the contributions to an RESP tax-deductible, like RRSP contributions are?
No, they’re not tax-deductible. BUT, that means that unlike RRSP’s, when amounts contributed are drawn out to pay for school, they aren’t taxable. The interest earned on the contributions is a different story.
When interest is earned on the contributions, do I have to pay tax on it?
Not until amounts are withdrawn from the fund. This means that the amounts put into the RESP can grow over many years, without being reduced by taxes.
When payments are eventually made out of the RESP, who pays the taxes, and what is taxable?
The contributions that YOU put in are not taxable to your child, because you didn’t get a tax deduction when you contributed. The portion of the payments that were contributed by the CESG and the interest earned are taxable, but students are generally in a low tax bracket (Who has time to work when in school full-time?). Many students are not taxable at all, and will not pay any taxes.
What if my child chooses not to attend post-secondary school?
The Canada Education Savings Grant can be shared with a brother or sister if they have grant room available. Otherwise, the grant must be returned to the Government of Canada.
If that happens, the money that you have put into the RESP is returned to you.You will not be taxed on the amount you contributed to the RESP, because you didn’t get a deduction for it, but you will have to pay taxes on the money that you earned in your plan as interest. This money will be taxed at your regular income tax level, plus an additional 20 percent.
When you close your RESP, you will have to pay tax on the earnings in the RESP. While the Canada Education Savings Grant must be returned to the Government of Canada, the earnings on the grant are yours, which is why you have to pay tax on them. You may be able to reduce the taxes you have to pay by transferring your accumulated income to either your or your spouse’s RRSP, if you have contribution room.
RESP’s are a relatively risk-free way to save money for your child’s education, with the added benefit of grants from the government, and tax-free growth during the years of the plan that your children are growing up. For more information, please see the Human Resources and Skills Development Canada page.