Registered Education Savings Plan

A Registered Education Savings Plan (RESP) is an effective way of financing post secondary education for children. RESPs are registered by the Government of Canada to allow savings for education to grow tax-free until the person named in the RESP enrolls in post-secondary education. An RESP is a contract between an individual (the subscriber) and a person or organization (the provider). Under the contract, the subscriber names one or more beneficiaries and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries.

The federal government and some provinces provide incentives to encourage RESP contributions, yet just over half of children age 0 to 17 in the Canadian population have ever received a RESP-related federal grant ; in other words, there are no RESPs opened for the other half of children, despite the "free money" being offered and the ever-increasing importance, and high cost, of post-secondary education. Encouragingly though, the RESP participation rate has steadily increased from 20% in 2000 to 52% in 2017.

This article first mentions the high and rising costs of post-secondary education. It then describes the main RESP features, including government incentives that can reach a total of 30% of contributed funds in some provinces. The article goes on to explore the three types of RESP accounts, i.e. family plan, individual plan, and group plan. There are three types of payments that can be made from an RESP and these are described next. The last sections of the article compare RESPs with TFSAs and suggest ideas for RESP portfolios.

Costs of post-secondary education
Tuition for undergraduate programs for Canadian full-time students was, on average, $6,838 in 2018/2019. Adding other compulsory fees brings the average total to $7,759 for 2018/2019. Some programs are much more expensive, and costs vary by province (e.g. almost $10k on average at the undergraduate level in Ontario). To this one might add $1000 or more for books and perhaps living costs of $10k-12k or more, for a total of at least $19k-21k per year, with a four year undergraduate degree costing on the order of $80k (or more). At 3% inflation, this means well over $100k eighteen years from today when today's newborn child begins university.

The Canadian Centre for Policy Alternatives reports that "Between 1990 and 2011 the average increase in tuition fees and ancillary fees was 6.2% (ranging from 3.4% in Newfoundland and Labrador to 7.5% in Alberta) while inflation over roughly the same period was 2.1%." Another way to look at the tuition increases is that in 1990, it took 293 hours of work at the minimum wage ($5 an hour) to pay the average yearly university tuition, compared to 505 hours at the minimum wage ($13 an hour) in 2018.

Given these costs, planning ahead is typically necessary and RESPs can be the ideal vehicle for education savings.

RESP features

 * A RESP is similar to a Registered Retirement Savings Plan (RRSP) in that they allow money to grow tax-free. The major difference is that you do not get a tax deduction when you deposit money into the account.
 * There are no restrictions on who can be the original subscriber under an RESP.
 * There are no annual limits for contributions (there were annual limits before 2007) to an RESP. For 1996 the limit was $2000 and for 1997-2006 the limit was $4000.
 * There is a current lifetime contribution limit of $50,000 for each beneficiary. For 1996-2006 the limit was $42,000.
 * Lower income families are also eligible for the Canada Learning Bond, a supplementary grant of $500 plus $100 for each year of a child's life through age 15, for a maximum total amount of $2000.
 * The account has a maximum contribution term of 32 years and must be completed by the end of the year that includes the 35th anniversary of the opening of the plan, with some rare exceptions called specified plans.
 * Funds can be withdrawn to pay for post-secondary education. Accumulated income and government grants are then taxed in the hands of the beneficiary. As most children have low incomes, withdrawals are likely to be taxed lightly if at all. Any contributed principal can be withdrawn tax-free by the original contributor.
 * If the beneficiary does not continue with an education beyond high school, government grants must be repaid and principal returned to the contributor. Accumulated income is taxable (at a penalty rate) in the contributor's hands, although tax may be deferred by contributing the funds to an RRSP.

Canada Education Savings Grant (CESG)
Employment and Social Development Canada provides an incentive for parents, family and friends to save for a child's post-secondary education by paying a grant based on the amount contributed to an RESP for the child. The CESG money will be deposited directly into the child's RESP.
 * The federal government will deposit a Canada Education Savings Grant when contributions are made for children up to age 17.
 * Only the first $2,500 of a contribution will be matched in any one year, typically at 20% with some increment for lower income families.
 * The lifetime maximum CESG is $7,200.
 * There are provisions for accumulation of unused CESG room to be carried forward.

Provincial incentives
Certain provinces encourage families to plan and save for their children's post-secondary education by offering incentives to open an RESP. Currently British Columbia (BC Training and Education Savings Grant) and Quebec (Québec Education Savings Incentive) offer such incentives. The Saskatchewan program (Saskatchewan Advantage Grant for Education Savings Program) is currently suspended. Formerly there was an Alberta Centennial Education Savings Plan, which is now closed. See Provincial Education Savings Programs for further details.

Types of RESP
There are three types of RESPs: family plans, individual plans, and group plans. The latter are not popular with members of the Financial Wisdom Forum due to their high fees, sales charges, and lack of flexibility. See also the articles listed below under external links, which compare different types of plans.

Once again, before you open a RESP of any type, inquire about all types of fees and charges, to avoid situations such as those: There are very low cost self-directed options available -- using family plans or individual plans -- with no sales charges, and which allow you to keep almost all of the returns, and they are discussed later in the article.
 * One BC resident has calculated that the "RESP he set up 11 years ago for his son had made more money for the fund’s managers and advisors than it returned to his child".
 * A Calgary resident was told by his group RESP provider that he would only get back $2k of the $8k he contributed, because of sales charges.

Family plan

 * You can name one or more children as beneficiaries.
 * They must be related to you either through birth or adoption.
 * Any or all of the children named in the plan can use the money.
 * You — or a financial advisor — decide how to invest the money.
 * Wide range of investment options.

Individual plan

 * There is one beneficiary who does not have to be related to you.
 * The beneficiary can be an adult, including yourself.
 * You — or a financial advisor — decide how to invest the money.
 * Wide range of investment options.

Group plan

 * Administered by a group plan dealer.
 * Investments normally limited to fixed-income securities, such as GICs, T-bills and bonds.
 * You are often required to sign a contract committing to regular contributions.
 * Savings are pooled and the amount of money each pool member receives depends on how much money is in that pool.
 * You can name only one child as beneficiary.
 * If the beneficiary does not go on to post-secondary education, you will get back only what you put into the plan.
 * Group plan RESP dealers are not insured against insolvency by an investor protection fund.

Tax on over-contribution

 * An over-contribution occurs at the end of a month when the total of all contributions made by all subscribers to all RESPs for a beneficiary is more than the lifetime limit for that beneficiary.
 * Each subscriber for that beneficiary is liable to pay a 1%-per-month tax on his or her share of the over-contribution that is not withdrawn at the end of the month. The tax is payable within 90 days after the end of the year in which there is an over-contribution. An over-contribution exists until it is withdrawn.

Payments from an RESP
The promoter can make the following types of payments: refund of contributions, educational assistance payments (EAP) and accumulated income payments (AIP).

Refund of contributions

 * Original contributions can be withdrawn tax-free, and paid by the promoter to the subscriber or to the beneficiary (student), when the student is enrolled in post-secondary education. There is no limit to the amounts of such withdrawls
 * If the beneficiary is not yet enrolled in a qualified educational program at the time of withdrawing the original contribution, Canada Education Savings Grant amounts received by the plan may need to be returned to the government.

Educational assistance payments (EAPs)

 * An EAP is the amount paid to a beneficiary (a student) from an RESP, to help finance the cost of post-secondary education. An EAP consists of the Canada Education Savings Grant, the Canada Learning Bond (CLB), amounts paid under a designated provincial program and the earnings on the money saved in the RESP. Specific situations apply under which EAPs are paid.
 * EAPs are limited to $5000 during the first 13 weeks of full-time study Then the limit becomes "the total educational expenses", broadly considered
 * The student has to report the EAP on his income tax return for the year. However, if the student's total taxable income is low, little or no tax will be payable. Furthermore, the student may use tuition tax credits and education tax credits to offset the income.
 * When withdrawing from a family plan RESP, attention must be paid not to exceed the maximum limit of $7,200 CESG paid per beneficiary.

Accumulated income payments (AIPs)

 * An AIP is an amount, usually paid to the subscriber, of the income earned from an RESP.
 * AIPs are paid when the RESP is not going to be used by the beneficiary for qualifying educational programs.
 * Specific conditions apply and the payment will be treated as income and is subject to two different taxes: the regular income tax and an additional tax of 20% (12% for residents of Quebec).
 * One way to avoid tax is to transfer up to $50k of earnings to your RRSP, if there is contribution room available

Planning the withdrawals
When beneficiaries become teenagers approaching the age of post-secondary education, the subscriber should find out which proportion of the account represents contributions and which proportion represents future EAPs. The RESP promoter should be able to provide this information. Or, future EAPs can be calculated by subtracting the total contributions from the current account value. For example, if the account value is $60k and you've contributed $40k, then obviously the future EAPs are worth $20k at this stage. In this example the EAPs can probably be paid to the beneficiary (student) over the first one or two calendar years of post-secondary education, without tax consequences, in the absence of other taxable income (check with a tax calculator to make sure). The idea of withdrawing the EAPs early is to make that sure they are used. If EAPs are larger, or if the student has other income, it might be advisable to spread out the EAPs out over a longer time frame to minimize taxes.

Special rules
There are few rules when you open an RESP. However, there are specific rules that apply when changing the beneficiary of an RESP or when transferring RESP property to another RESP. See Special rules - RESP for more details of these rules.

Transferring between institutions
Transferred between Registered Education Savings Plans (RESPs) held within different financial institutions requires the cooperation of the transferring and receiving RESP promoters. There are multiple forms involved, HRSDC SDE 0088 (Form A); HRSDC SDE 0089 (Form B) and HRSDC SDE 0090 (Form C). Promoters must also submit accurate transfer transactions to the Canada Education Savings Program (CESP) system of Employment and Social Development Canada (ESDC). In addition, when undertaking the transfer, certain conditions are required to ensure that the beneficiary continues to be eligible for the educational incentives. The full PDF guide to the process is Chapter 3-1 in Registered Education Savings Plan (RESP) Provider User Guide.

RESP or TFSA?
Beyond the amount that attracts the maximum CESG grant, should you still make RESP contributions? Or if you have space in your Tax-Free Savings Account (TFSA), should that be used for additional education savings instead? One author makes the case that: The reason being that TFSAs are more flexible and that withdrawals are not taxed.

RESP frontloading
However, if all other registered accounts are already maxed out (a nice problem to have), then it might make sense to contribute more than the $36k needed to get all the CESG, perhaps all the way to the $50k limit. This provides $14k of additional registered room for up to 35 years, which can be contributed as early as year 1 if the money is available, a strategy called "RESP frontloading".

Asset allocation
Keeping it simple: glide paths

The present section assumes that all RESP money is intended for post-secondary education and will be paid to the beneficiary at approximately known dates. When a child is born, we have a good idea when post-secondary education, if any, will begin: when the child is about 16-19 years old. At that stage, withdrawals from the RESP will start, and the RESP should clearly be invested in cash equivalents and/or short term fixed income (bonds or GICs). But when the child is younger, a proportion of the RESP portfolio can be in equities. One way to plan the transition from riskier assets with a higher expected return to a more conservative asset allocation is called a glide path. The US-based Bogleheads wiki offers the following Vanguard-inspired Education savings plans glide paths, where post-secondary education is assumed to start at age 18:

Percentages equity / fixed income / cash

When the start of post-secondary education gets near, the investor may turn to liability matching to guide the RESP portfolio.

More complex strategies

EAPs have to paid to the children attending post-secondary education, so that part of the RESP should be invested accordingly, for example using a glide path as discussed above. On the other hand, original contributions can be paid either to the contributor or to the beneficiary, at the decision of the contributor, depending on factors such as education costs, other savings and sources of income, family values, etc. Theoretically then, the chosen asset allocation for the original contributions will depend on the contributor's intentions. Some or all of these original contributions could be thought of as belonging to a retirement portfolio, and managed accordingly.

Implementation
The chosen glide path can be implemented in a RESP mutual funds account or a RESP discount brokerage account, for example using simple index portfolios. The latter type of portfolio can be implemented with index funds or exchange-traded funds.

Asset allocation ETFs could also be used, with the whole portfolio invested in a single ETF that is changed every 5 years to a more conservative one. For example, the 'moderate' glide path listed above could be approximated using the following Vanguard Canada funds from age 0 to 15 (see also ):
 * Age 0 to 5: Growth ETF Portfolio (VGRO, 80% equity/20% fixed income)
 * Age 6 to 10: Balanced ETF Portfolio (VBAL, 60% equity/40% fixed income) or Conservative ETF Portfolio (VCNS 40/60)
 * Age 11 to 15: Conservative Income ETF Portfolio (VCIP, 20% equity/80% fixed income)
 * Age 16+: Bond ETFs, GIC ladders, HISAs, etc.

If the approach of liability matching has been adopted, then fixed income ladders can be used, with bond/GIC maturity dates matching planned education expenses. Fees of all types must be minimized.

Before opening an RESP account, consider and ask if you are eligible to a provincial program. Financial institutions do not offer all programs available. It could influence your choice of a RESP mutual funds account or a RESP discount brokerage account.

CDIC coverage
Since April 30, 2021, RESP assets that are held in deposit accounts, such as bank accounts or a high-interest savings account, receive separate CDIC protection up to $100k.

RESP basics and post-secondary education

 * Financial Consumer Agency of Canada, Budget for Student Life
 * Government of Canada, Benefits, Registered Education Savings Plans
 * Canada Revenue Agency, Registered Education Savings (RESP)

Provincial grants

 * Employment and Social Development Canada, List of RESP Promoters: includes promoters offering the British Columbia Training and Education Savings Grant (BCTESG)
 * Revenu Québec, List of RESP promoters who offer the Québec education savings incentive (QESI)

Types of RESPs

 * Informetrica Limited, Review of Registered Education Savings Plan Industry Practices, report prepared for Human Resources and Social Development Canada
 * Canadian Capitalist, Is a Group RESP Plan Right for You?, March 26, 2007. Drawbacks of scholarship plans include: (i) lack of flexibility; (ii) "you’ll derive full benefit from the program only if your child attends a four-year degree program"; (iii) invested only in low-risk assets, even when your child is still a baby; (iv) many types of fees are involved.
 * Canadian Capitalist, Group RESP Plans are Loaded with Fees, January 21, 2013. "The bottom line over the first three years is quite simple. The self-directed RESP incurred a total cost of just $60. The group RESP incurred a total cost of $3,721."

RESP portfolios

 * MoneySense, The smart way to save for school, November 2, 2010
 * MoneySense, Taking Risk in an RESP, November 5, 2010
 * Canadian Couch Potato, Why RESPs Should Be Kept Simple, October 22, 2012
 * Graham Westmacott, RESP Investment Strategies, PWL Capital Inc, August 2014

RESP withdrawals

 * MoneySense, 4 things to get right when tapping RESP savings, May 2017