RESPs More Than A Tax Advantage

Published date09 December 2022
Subject MatterTax, Income Tax, Tax Authorities
Law FirmMinden Gross LLP
AuthorMs Samantha Prasad

June is here and with it comes a school calendar full of endof-year events, with the biggest being our kids' graduation. Whether your children are graduating from kindergarten or high school, the same question is on most parents' minds: How to pay for university or college?

So what about a savings program that has some extra bonus points in the form of taxdeferred growth?

One such tax-saving vehicle, which has been quite popular over the years, is the Registered Education Savings Plan (RESP). While contributions to RESPs are not tax-deductible (so not as good as an RRSP), they are invested in a special fund in which earnings accumulate tax-free until they are distributed as payments for postsecondary education to children, grandchildren or other designated beneficiaries.

There are, however, no relationship requirements between the contributor and beneficiary, so that you may set up an RESP for any relative or deserving beneficiary (as long as they are a Canadian resident who can provide a Canadian Social Insurance Number (SIN)).

There are three types of RESPs:

  1. Individual RESP plans: This plan is simple - anyone can open an individual RESP for a particular beneficiary and contribute to it This can be a parent, a grandparent, or anyone who wants to benefit the child.
  2. Family RESP plans: In a family plan, you can have one or more beneficiaries, although they all have to be related to the contributor (this includes nieces and nephews). The beneficiaries also have to be under 21 when they're added to the plan.
  3. Group RESP plans: In a group plan, one single child is the beneficiary, and that child does not have to be related to you, but many people are contributing to this plan. So essentially, the beneficiary shares the pooled earnings of investors with children of the same age. Group plans tend to have more restrictions and rules than other plans.

The benefits of an RESP arise through three mechanisms:

  • Tax deferral: income earned on the (non-deductible) contributions you make to the plan is not subject to tax accordingly income accumulates more rapidly in the plan than it would in the hands of the contributor;
  • Income splitting: when amounts are paid out of the plan for the post-secondary education of a beneficiary they will be taxed to the beneficiary. This can result in little or no tax being ultimately paid on the earnings, since a taxpayer (i.e. the child) with no other income can earn at least (approximately) $14,000 (for 2022) annually completely tax...

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