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RESP Tax Deduction in Canada: All You Need To Know

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Between 2006 and 2021, the annual  cost of undergraduate tuition in Canada has almost doubled, from $4,400 to $6,693. If you consider this outrageous tuition, food, school supplies, and housing, post-secondary education has become very expensive. 

But since your child was only recently born, How much is tuition in 2035?

If the cost of a college education increases by 6% annually, and your child enters a private college in the 2035–2036 academic year, the estimated tuition will be $57,544

To help parents save for their child’s future education, there are several options available such as the government program RESPs and Child Plan, your own private tax free education savings plan.

In this article we’ll cover the Child Plan and RESPs along with the tax deductions you should be aware of for RESPs.

What is A Registered Education Savings Plan (RESP)?

Registered Education Savings Plan (RESP) is a government savings program that encourages parents to set aside money for their child’s future post secondary education. While it is the most well publicized program It is just one vehicle used by parents and grandparents to save for their children. 

However, for those parents who want to save for their children’s future without government rules, A participating whole life plan is a tax-free solution that provides annual dividends during your child’s entire life, not only to age 17 and offers your child unlimited options that your child could use the money for beyond just education. Child Plan is the fastest growing alternative to the RESP and a private savings plan that provides the following benefits to your child:

  • Flexibility, security and guaranteed
  • Annual tax-free dividends during your child’s entire life
  • The cash value in their plan is guaranteed and grows completely tax free for life
  • It can be opened as early as the child is 14 days old or even for kids over 18 years
  • There are no Government set minimum or maximum deposits
  • Savings can be used to cater to any education your child will want to pursue or not, buy their first house, or any other financial need they may have in the future.

If you wish to get a clear picture of how your child’s personal savings will be growing and how valuable it could be in their future, simply request a personalized  Child Plan illustration that matches your dreams for your child’s future needs.

Now, going back to RESPs. RESPs are made up of;

  • A contributor. Also known as a subscriber, who must be at least 18 years, a resident of Canada, and has a social insurance number. Depending on the plan, this can be anyone from the parents, grandparents, relatives, and even friends of the parents.
  • A beneficiary. is the child who will benefit from the contributions made in the RESP once they join higher education institutions. They will access the funds known as educational assistance payments (EAPs) to pay for all school-related expenses.
  • A promoter. This is the financial institution or scholarship plan dealer who sells the RESP plans, is paid for selling the plans and manages all the funds parents pay into the plans sold by their company. They are also the people responsible for all EAP payments to parents.

Are RESP contributions tax-deductible in Canada?

No- You do not get a tax deduction for money you contribute into an RESP. The money that your investment earns while it is in the RESP will not be taxed until money it’s withdrawn to pay for your child’s education. Money paid out of the RESP is taxed in the hands of the student. However it’s important that when you withdraw you make sure that the institution issuing the payments identifies which part of the payment is a return of your capital (your deposit) which should not be taxed, which part is the grant which should not be taxed and the growth which is the only taxable portion. This is an important step as the institution will likely give you a slip with one amount and you may have to pay taxes on the entire withdrawal when you don’t need to.

Sounds complicated. It is.

Are RESP withdrawals tax-free?

  • When the beneficiary (your child) withdraws money from the RESP account to pay for education, the amount withdrawn is considered as income and may be taxed. The amount of tax is based on what income they earn from all sources that year.  If the child’s overall income (including the withdrawn RESP amount) is below the taxable rate, they are not required to pay tax.
  • If the beneficiary doesn’t use the amount and it is refunded back to the contributor, it will be tax-free.
  • However as noted above. Please pay attention as to how the withdrawal is reported by the financial institution. Or you will end up paying taxes on all the withdrawals.

What happens if your child opts out of post-secondary education?

If your child opts to choose a different path than a traditional post-secondary education or a vocational training program that will not be approved by the Government of Canada, then you have the following options.

You will not be taxed for the money you contributed to the RESP. However, all the interest and market gains earned during the plan’s lifetime will be taxed at your marginal tax rate plus an additional 20% penalty

The grants received from the government will need to be returned to the government as it was not used for its intended purposes, even if you lost it on the stock market. 

If you close your RESP account before your child turns 18 because you don’t feel it’s going to work out. You have to follow the same steps above or you can opt to leave the account open and stop contributing. This way you have the chance that the child may end up using it once they reach 18. We don’t know what our kids will do when they’re 18, so wait it out.

Given all the taxes and fees you’d have to incur if your child doesn’t end up pursuing a post secondary education in Canada, we often recommend parents to seriously consider the Child Plan. It offers a lot more flexibility and it’s always going to be tax free in all circumstances.

RESP withdrawal limits

To protect kids from wasting their post-secondary education savings, RESP providers put a withdrawal limit at the beginning of their post-secondary education. The child can only withdraw up to $5,000 over the first 13 weeks after joining post-secondary education and $2500 if they are part-time. 

After 13 weeks, they can withdraw any amount of the saved money as long as they continue with their studies.

Types of Registered Education Savings Plans

There are three types of RESPs, including:

  1. Family RESP

This family plan works best for households with more than one child because you can transfer it from one child to another. However, the contributor must be blood-related to the beneficiary or be an adoptive parent.

  1. Individual RESP 

As you can tell from the name, this plan only allows one beneficiary. The contributor doesn’t have to be a blood relative, and there are different types of investments to choose from within the plan.

It’s important to talk with your broker and understand your investment options so you can make the right decision.

RESP alternatives

As previously mentioned, a Registered Education Savings Plan (RESP) is just one savings option for your child’s education.

You can also start a Child Plan for your children in Canada. It is a private insurance plan, and one of the best alternatives to RESP. Child Plan, which is a Participating Whole Life insurance plan, gives parents and guardians like yourself, the freedom to save for any opportunity the future holds for your family. Some of the main benefits of choosing Child Plan include:

  • Flexibility and security
  • Offer annual tax-free dividends for the plan’s lifetime (money grows tax free!)
  • It can be opened as early as the child is 14 days old or even for kids over 18 years
  • There are no minimum or maximum saving amounts
  • Savings can be used to cater to your kid’s education, buy their first house, or any other financial need they may have in the future.

The opportunities are endless with Child Plan to help you save money. If you wish to get a clear picture of how your child’s personal savings will be accumulating, simply request a  Child Plan illustration to get a personalized plan that matches your kid’s needs.

Sample illustration of Child Plan™ Cash and Insurance Values

Based on a Monthly Deposit of $250 per month

Age Accumulated Cash Value Life Insurance Value
20 $82,568 (Education) $612,728
35 $177,953 (House) $1,115,297
45 $303,299 (Security) $1,115,297
65 $834,276 (Retirement) $1,666,824

Sample illustration is based on a monthly contribution of $8.32 a day/$250 a month for twenty years, starting when the child is less than 1 years old. Cash and life insurance values are based on the current dividend interest rate of 6% from a Canadian life insurance company. This example is strictly for illustrative purposes only, the annual dividend scale is not guaranteed and values may differ.

Personalize Your Child Plan™

Request a Child Plan™ Illustration and see how much cash value your child will have for their education and for life.

Request Illustration

*illustrations are reflective of the annual premium amount

Have a question about Child Plan or wish to speak with a Family Advisor?