Putting children through university or college can be expensive. If you don’t plan ahead of time, the expenses for their post-secondary education (PSE) could be crippling. Fortunately, the Canadian government provides help through the Registered Education Savings Plan (RESP). Another avenue you can take to help save money for their PSE is through a Tax-Free Savings Account (TFSA).
The RESP is a PSE specific tax-deferred investment where you can contribute up to a maximum of $50,000 per child.1 Through a TFSA, which is a general savings account that can be used for school, you can contribute $5,500 annually.2
There are benefits to both savings plans. The real difference, however, comes with the incentives provided by the government and how taxation is handled when it comes time for your child to remove the money from the RESP or TFSA.
While the money you put into an RESP has already been taxed, the money you earn in the RESP is not taxed until it is withdrawn. That means the earnings in the RESP are not taxed as long as the money stays in the plan. On top of that, when the funds are withdrawn for PSE purposes, it is taxed at the student’s low tax rate, which usually means they pay little or no tax.
Canada Education Savings Grant (CESG)
One of the greatest advantages of an RESP over a TFSA is that the government will give you up to $500.00 annually in the form a Canadian Education Savings Grant (CESG).3 The CESG automatically matches 20% of your RESP contribution up to a lifetime maximum of $7,200. This additional money can then be invested for further compounding. With bank interest rates hovering near zero, it’s pretty tough to beat a 20% return on investment. Those from low-income families can receive an even bigger grant.
Canada Learning Bond
Another benefit of an RESP over a TFSA is the Canada Learning Bond. A $500.00 Canada Learning Bond is provided to children of families who are entitled to the National Child Benefit Supplement (NCBS) and are born after December 31, 2003.4 These children also qualify for Canada Learning Bond installments of $100.00 annually until they reach age 15 (as long as they continue to receive the NCBS). The maximum total Canada Learning Bond per child is $2,000. You are also not required to make contributions in order to qualify for the Canada Learning Bond.
Provincial Government Incentives
Still another benefit to contributing to an RESP over a TFSA is provincial government incentives.5 Through the Quebec Education Savings Incentive annual RESP contributions of up to $2,500 are eligible for a tax credit of 10%. Lower-income families are eligible for a 5% to 10% increase on the first $500.00 contributed annually to the RESP.
With the Saskatchewan Advantage Grant for Education Savings (SAGES), the government of Saskatchewan matches up to 10% of annual RESP contributions up to a maximum of $250.00 per year until the calendar year in which the child turns 17.
Through the British Columbia Training and Education Savings Grant (BCTESG), the B.C. government will pay a one-time grant of $1,200 to an RESP beneficiary.
Easy-Access TFSAs Are Tempting to Spend
It can be difficult to withdraw funds early from a RESP for non-educational purposes. Not so with a TFSA. The money in a TFSA can be easily accessed, and because it’s easy to access, it can be difficult to save for its intended, educational purposes.
To withdraw money from an RESP, you need to provide proof that the recipient of the RESP is going to an approved PSE. You don’t need to show receipts for specific purchases. With an RESP, if the recipient doesn’t attend a PSE or withdraws the money early, any RESP grants paid into the account are removed. Anything left in the account is taxed at the recipient’s marginal tax rate plus 20%.6
Global RESP Corporation, Helping Canadians Maximize Their RESP Contributions
Global RESP Corporation (GRESP) is a leading provider of RESPs in Canada. With offices in British Columbia, Alberta, Ontario, and Quebec, and hundreds of independent representatives across the country, GRESP is one of the fastest-growing companies in the RESP industry.
GRESP is one of the few companies that administer all provincial and federal grants available. We are also the primary distributor of the Legacy Education Savings Plan and the Advanced Education Savings Plan (sponsored by the Global Educational Trust Foundation and offered by Full Prospectus through registered Dealing Representatives).
The financial professionals at GRESP are here to help you save for your child’s PSE, maximize all government grants, and ensure your investment in an RESP is growing.
- “Registered Education Savings Plans,” Government of Canada, last accessed August 31, 2016; http://www.esdc.gc.ca/en/resp/index.page.
- “The Tax-Free Savings Account,” Revenue Canada, last accessed August 31, 2016; http://www.cra-arc.gc.ca/tfsa/.
- “Canada Education Savings Bond,” Service Canada, last accessed August 31, 2016; http://www.servicecanada.gc.ca/eng/goc/cesg.shtml.
- “Canada Learning Bond,” Government of Canada, last accessed August 31, 2016; http://www.esdc.gc.ca/en/education_savings/clb.page.
- “Provincial education savings incentives,” Government of Canada, last accessed August 31, 2016; http://www.esdc.gc.ca/en/education_savings/provincial.page.
- “Information About Registered Education Savings Plans,” Government of Canada, last accessed August 31, 2016; http://www.esdc.gc.ca/en/resp/info.page.