A Registered Education Savings Plan, or RESP, is an investment vehicle generally used by parents to save for their children’s post-secondary education in Canada. The principal advantages of RESPs are the access to the Canada Education Savings Grant (CESG) and a source of tax-deferred income.
An RESP is a tax-sheltered investment vehicle, designed to benefit post-secondary students. With RESP, contributions having already been taxed at the contributor’s tax rate, the investment growth (and CESG) is taxed on withdrawal at the recipient’s tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax, owing to tuition and education tax credits.
So, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student will have a good source of income to fund his or her post-secondary education.
The RESP contribution also entitles you to access the Canada Education Savings Grant, which is provided to complement RESP contributions. The Government of Canada contributes 20% of the first $2,500 in annual contributions made to an RESP. The government may also contribute up to $500 per year to a participating RESP. This income is available upon withdrawal from the RESP by a post-secondary recipient, with a maximum lifetime contribution of $50,000. Any contributions over this amount are subject to taxation.
The government grant called Additional CESG, allows an additional 10% or 20% for a total of an extra 30 or 40 cents on each dollar of the first $500 contributed to an RESP, depending on the family income of the beneficiary’s primary caregiver. An application can be made through LVCU.