In my previous post, I talked about how much you can contribute to an RESP, how the federal and Quebec governments contribute to the plan, and how you should adjust your investment risk over the term of the plan.
RESP and your taxes
What I haven’t talked about is the tax treatment of these plans. Unlike RRSPs, contributions to an RESP are not tax-deductible. As a result, you can withdraw the amounts you contributed to the plan tax-free. Now, growth and grant money, which I mentioned in my previous video, are taxed in the child’s tax return in the year they are withdrawn from the plan. However, this usually doesn’t incur any tax, since your child probably won’t be earning much during their college or university years. After all, this is why you started an RESP for them!
Now, in order to withdraw funds from an RESP, you’ll need to provide proof of enrollment in a post-secondary institution like a college, university, trade school or CEGEP in Quebec. Letters of acceptance aren’t valid as proof of enrollment. The registrar’s office at any school in Canada is very used to providing these proof of enrollment letters for RESP withdrawals. Many schools make them available for download through the student’s online portal.
Certain limits apply in the first semester of enrollment. A full-time student can withdraw $5,000 of growth and grant money in the first 13 weeks of school while a part-time student can withdraw $2,500. After that first semester, the entire amount can be withdrawn. There are no limits on withdrawing the contributed amounts.
A common misconception is that you’ll need to provide receipts to withdraw money and that’s not true. You don’t have to show what the money is being spent on. All you have to do is show that your child is attending a qualifying school.
Now, what if your child never goes to a qualifying school? If they don’t, all grant monies are repaid to the federal and provincial governments, the original contributions come out tax-free to the subscriber (the person who set up the plan) and, here’s the not-so-nice part, any growth in the plan is taxed at the subscriber’s marginal tax rate, plus 20%! Make sure you withdraw everything while your child is at school because if you forget or they don’t go to university or college, the penalties are onerous! An RESP can stay open for 36 years so there’s lot’s of time for your kids to get back on track if they delay college.
How about private school?
I’ve talked a lot about saving for a post-secondary education but some of my clients have asked me how they can save to send their child to a private high school, and I want to talk about that briefly.
Unlike the RESP, there is no registered vehicle to save for private high schools. There are no grants or bonds available but if you want to save, invest and grow your savings tax-free, a Tax-Free Savings Account or TFSA is a good option. You can put in $52,000 if you’ve never had one and keep contributing up to $5,500 annually. The same investment principle of more risk in the earlier years of the plan and less risk as your child gets ready for high school applies here as well.
The bottom line is an RESP is an underrated and underused vehicle to save for your child’s education and I highly recommend starting one. Knowing how they work means you can maximize the benefit of your contributions and give your child the gift of a university education without the dreaded debt load. Just make sure they don’t spend it all at the pub!