Canada Education Savings Grants!

A Parent's Dream Revived.

Parents want the best for their children.  For many, this means ensuring that their children have the financial means to get a post secondary education.  There is a way to save for this education, receive some government assistance, and defer some income tax.

Contribution to a Registered Education Savings Plan (RESP) are eligible for Canada Education Savings Grants (CESGs) from the government.

What is an RESP?

An RESP is a savings plan for post-secondary education which allows funds to be accumulated tax free until drawn out.  Maximum annual contribu­tions to RESPs are $4,000.  When your child pursues a post-secondary education, the plan pays the student taxable education assistance payments.  The interest portion of these payments is then taxable to the students.  However, with the allowable personal, tuition, and education tax credits, most students pay little or no tax on the taxable portion of the assistance payments.

What is a CESG?

If you make an RESP for a child or other beneficiary who is under 18, a govern­ment grant will be added to your contri­bu­tion at 20% of your contribu­tion, to a maximum of $400 per year.  That means, only $2,000 of your maximum $4,000 annual contribu­tion qualifies for the grant.  The maxi­mum lifetime grant for each beneficiary is $7,200 or $36,000 of a parent’s contri­bution.  Once your child attends post-secondary education, the accumulated grants and interest of the plan are taxed as income in your child’s hands.  It should be noted that grants will not be available until the beneficiary has obtained a social insurance number.

To prevent plans from being set up immediately before a child goes to college or university, there are further limitations on the CESG for older children.  If the beneficiary is 16 or 17, an RESP plan must have already been in place with a minimum of $300 per year contributed for the last four years or the total contributions made in previous years of at least $4,000.

What If You Can't Contribute $ 2000 In A Year?

If you are unable to contribute $2,000 to an RESP in a year to earn the maximum CESG, the unused room is carried forward and can be claimed in later years.  The maximum annual grant available is the lesser of the CESG room available or the annual maximum contribution of $4,000 ($800).  For example, if you do not make RESP contributions for the first five years of your child’s life, the accumulated balance eligible for grants in year six is $10,000 ($2,000 x 5 years).  The maximum RESP contribution that would qualify for a grant in year six is $4,000 for a grant of $800.  This is 20% times the lesser of the maximum annual contribution of $4,000 and the accumulated balance of $10,000.

What Happens If I Make An Early Withdrawal From A RESP?

To deter a taxpayer from withdrawing funds from an RESP before post-secondary education, early withdrawals constitute repayment of some, or all, of the grants received.  The amount repayable equals 20% of the early withdrawal up to the total grants received to date.  For example, an early withdrawal of $5,000 of RESPs will require $1,000 of grant repayment (assuming $1,000 in grants have been received in the past).  The government deems that RESPs qualifying for a grant are withdrawn before non-qualifying RESPs.  Be careful, other events can trigger a CESG repayment, such as termination of the RESP plan, certain transfers between RESPs if the beneficiary changes, and failure of the beneficiary to attend post-secondary education.

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