September 2006

Learning to save, saving to learn

The start of a new school year has just reminded parents that education has its price – one that seems to get higher every year. So it’s also a good time to remember that a registered education savings plan (RESP) is an excellent tool for leveraging the money you put away for your child’s education.

HypothequeRESPs have been available in Canada for many years, but in 1998 they suddenly became much more attractive. That’s when the federal government introduced the Canada Education Savings Grant (CESG), a “gift” of as much as $400 a year paid into the RESP on behalf of your child. Since then, the number of RESPs in existence has more than doubled to 2.6 million. Canadians have a total of close to $17 billion invested in these savings plans.

An expensive lesson

This is in response to the sharp increase in tuition fees, which have tripled on average over the past decade following cuts in federal and provincial support for universities and colleges. According to Statistics Canada, while annual tuition fees vary considerably depending on the school and the program, current averages range from a low of about $1,900 in Quebec to a high of over $6,200 in Nova Scotia. The Canadian average is more than $4,200 a year.

Keep in mind that this doesn’t include any additional – and unavoidable – expenses such as textbooks and compulsory “ancillary” fees (for university athletics and health programs, for instance). Statistics Canada figures show that, 15 years from now, four years of university education in Canada could cost up to $67,000 (including food and housing). So it’s not surprising that students can find themselves saddled with thousands of dollars of debt by the time they graduate. Even though rate hikes have moderated somewhat in recent years, the cost of post-secondary education is still rising faster than inflation.

RESP to the rescue

You can mitigate this educational sticker shock by using an RESP to start saving now for your children’s post-secondary education, and to shelter these savings from taxes until your children are ready for college or university. There are other benefits as well:

  • While your RESP contributions are not tax deductible, they do have a distinct advantage: you will be eligible for a CESG equal to 20% of your annual contribution, up to a maximum of $400 for each year (or a plan lifetime maximum of $7,200).
  • You are entitled to this grant every year, whether you use it or not. So if your contribution for this year isn’t high enough to get the full amount, you can make up the difference with a higher contribution next year. In fact, your CESG could be as much as $800 in a single year, i.e. 20% of the maximum annual contribution of $4,000.
  • Depending on your income bracket, you might be eligible for a Canada Learning Bond of $500 for the first year and $100 for subsequent years.
  • You might also be eligible for an enhanced CESG (E-CESG) on the first $500 of your contribution for each year.

Who should have an RESP?

There really is no better way of financing a un iversity education for your child – or any child. In fact, you can name anyone as the beneficiary of an individual RESP: your child, grandchild, niece or nephew – even yourself or your spouse. And anyone can contribute to this type of plan, which means that it can be a collective project. For instance, grandparents, parents, and godparents can all make small weekly payments to help build up to the maximum contribution.

Family RESPs are more restrictive: you must be related to the beneficiary by blood or adoption. However, family RESPs can have more than one beneficiary, and when the plan matures the proceeds can be divided among the beneficiaries as you see fit.

The sooner the better
An RESP works on the same principle as an RRSP: the income earned on your capital within the plan is tax sheltered for the life of the plan. This feature means that, financially speaking, it’s a good idea to open an RESP as soon as you have children.

Learning to make the most of RESPs now will make it a lot easier to pay for your children’s education when the time comes.

RESPs in brief
Maximum annual contribution $4,000
Lifetime RESP contribution limit: $42,000
Annual CESG 20% of RESP contribution
Maximum unused amounts: $400
- with unused amounts carried foward: $800
Lifetime CESG limit per RESP beneficiary: $7,200
End of cotributions  
- family plan: year in wich the beneficiary turns 21 after 22 years
- individual plan: after 22 years
Mandatory RESP termination after 26 years


For further information

Canada Revenue Agency: