It’s back-to-school time for families. But even if your child or grandchild is too young to be in school, it’s not too early for you to be getting ready for their education.
That’s because there are government incentives to start saving early for your little one’s post-secondary learning, with various incentives that apply to families at all income levels. Once the child has a Social Insurance Number, you can open a Registered Education Savings Plan (RESP).
The RESP is opened with a financial institution by a subscriber—often the parent, but it can be anyone. A plan may contain a single beneficiary or multiple beneficiaries if it’s a family plan.
There is no annual limit for contributions, but there is a lifetime limit of $50,000 per beneficiary. Contributions to the plan are not tax deductible; the benefits arise from the non-taxation of earnings within the plan, and the grants and bonds offered by the government as a tax-free contribution.
The Canada Education Savings Grant (CESG) supplements your contributions to the plan. The basic CESG, available to all subscribers regardless of income level, will match the first 20% of annual contributions up to a maximum of $500 per year, with a lifetime maximum of $7,200.
To assist modest-income families, there is an additional CESG that can increase the annual limit to $550 or $600, based on family net income.
On top of that, the Canada Learning Bond (CLB) is available to eligible children from low-income families who were born in 2004 or later. An initial payment of $500 is deposited into the RESP on creation of the plan, plus an additional $100 per year for each additional year of eligibility, up to age 15. It’s helpful to know that annual contributions do not need to be made to the plan by you to receive the CLB.
The beneficiary of the RESP becomes eligible for educational assistance payments (EAPs) which are included in the taxable income of the beneficiary in the year of withdrawal. EAPs can often work out to be tax-free because many post-secondary students have a taxable income below the basic personal exemption, or they have tuition tax credits available to apply against any income tax payable.
Although your child’s or grandchild’s post-secondary studies may be years away, the RESP provides helpful reasons to begin preparing now.
