RESP Rules and Regulations

RESP rules and regulations: what you need to know

By now we know what RESP’s are, namely a registered education saving plan account. It earns you money and puts your mind at ease. But how does it work? Do you need to pay in tons of money at a time? It can be confusing to work out how contribution to the account works, especially if you have multiple people adding to the fund. Luckily we have the low down on all the rules about contribution and everything else you need to know!

There are some basic rules to contributing to the account, such as that your child must have a SIN (Social Insurance Number) and must be a Canadian citizen to be eligible, just like for most other accounts in Canada. Now this is the part that can get a little bit tricky. If you have a RESP account, you obviously put in a specific amount of money a year to keep the account growing. For that specific amount, the Canadian government adds a 20% grant, or additional money, to the account. So since 2007, you need to pay about $2000 into the account to receive a grant, which comes to about $400.

If you pay over $2000 into the account per year it’s still ok, but you might not get a grant. This is because of what they call a “contribution room”. If you are able to pay more than the contribution room allows, they assume you don’t need assistance so you don’t qualify for a grant that year. That means that if you pay within the contribution room the next year, you’ll qualify for the grant again. Since 2007, the government has actually tweaked the rules a bit to ensure that if you pay $2500 annually, the grant actually goes up to $500. Pretty neat right?

Just remember that the grant isn’t indefinite- as in it won’t be there forever. Every child with a RESP account can only get up to $7200 of grant in their lifetime. After that it’s their turn to start working to pay for their own studies- especially since the maximum RESP accounts can take before they close is $50 000. The rest isn’t that hard. If you open the account when your kid is 2, you have until they turn 17 to contribute to the account. So the earlier you start, the better! But think about it, that’s about 15 years’ worth of payments and grants- they’ll go a long way to ensuring a bright future.

And what if you missed the previous year? No stress, you can pay 2 years’ worth of contribution every time- one for the current year and one for the past one you missed. They really built this system to be as open to you as possible.

So with contributions covered, let’s take a look at withdrawals. The rules are pretty clear for this section. Your child has to attend a government approved tertiary education facility, so basically any college, university, trade school or trainings that are on the approved list, which is pretty all-encompassing. Next, your contributions can be withdrawn completely tax free, and will only be taxed when it’s actually used.

As is obvious, whenever you make a withdrawal you need to show proof of enrolment at your college or school, so that they can be sure you’re still being educated. That money is then yours to do with as you please since you don’t have to show receipts for your expenses. But what if your child drops out, or decides not to study further?

If that happens there are one of two options to take. Either you can transfer the account to a close relative of the original account holder, like a sibling, or you can close the account. This does come with some penalties though, but this can be lessened if you still have some contribution room left. No matter what happens, RESP doesn’t leave you in the dust!

The advantages of RESPs are the access to the Government of Canada program CESG or Canada Education Savings Grant.


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