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RESP: an investment in their future - DFSIN - SFL

RESP: an investment in their future

When it comes to your children’s post-secondary education, it’s never too early to start thinking about how to pay for it. Fortunately, the registered retirement education fund (RESP) could help with that.

September 17, 2021

Post-secondary education is not exempt from the hard law of inflation: not only is it expensive, but the cost keeps rising as time goes by. In 2020-2021, according to Statistics Canada, a Canadian student could expect to pay about $6,580 per year for undergraduate studies, up 1.7% from the previous year, or $7,304 for graduate studies, an annual increase of 1.6%.

These figures can vary widely depending on the province and the specialty. The following diagram gives some idea of average tuition fees at the national level for various fields of study (for a more accurate picture by province of residence, check out the interactive tool available here).

Horizontal bar graph showing the average undergraduate tuition fees for Canadian full-time students for 2020-2021. The graph gives the cost for different academic disciplines. Dentistry is at the top of the list at close to $25,000. At the bottom is education at about $5,000. Other disciplines include medicine at about $15,000, law at just under $15,000, architecture at about $8,000, and humanities at about $7,000.

As we can see, if these costs come on top of related expenses such as accommodation, food and transportation, three or four years of undergraduate study could easily result in a steep bill for students or their parents – especially in families with several children.

The registered education savings plan (RESP) could help make this bill easier to handle. It has two main features: favourable tax status and a grant program that substantially enhances the subscriber’s contributions.

Favourable tax status

The RESP is to post-secondary education what the registered retirement savings plan (RRSP) is to retirement: a type of investment account where earnings and gains accrue over the years in a tax-sheltered environment until they are needed. Unlike the RRSP, RESP contributions are not tax-deductible, but they do qualify for significant grants, as we will see below.

When the beneficiary begins studies at a qualifying institution, the accumulated savings can gradually be withdrawn to cover expenses – whether tuition or other costs. At that point, the money corresponding to the original contributions would be deemed a tax-free return of capital. The remainder, consisting of grants and accumulated income, would be deemed Educational Assistance Payments (EAP) and would count as taxable income for the student, who would likely be in a low tax bracket.

Note that there are individual and family RESPs and that, depending on the plan type, many different people are allowed to contribute: the parents, of course, but also grandparents, aunts and uncles, for example. Finally, the lifetime contribution limit for the plan is set at $50,000 per beneficiary.

Significant grants

Along with its attractive tax treatment, an RESP provides automatic eligibility for grants, some at the federal level (the Canada Education Savings Program or CESP) and others at the provincial level.

At the federal level, the main program is the Canada Education Savings Grant (CESG). It has two components: the basic CESG, which is 20% of contributions regardless of household income, and the additional CESG, which can add 10% to 20% if household income is below $98,040 in 2021. In all, these grants could total a maximum of $7,200 over the lifetime of the plan. Note as well that the federal programs include another measure known as the Canada Learning Bond, which is designed for low-income families and could amount to $2,000.

At the provincial level, Quebec offers the Quebec Education Savings Incentive (QESI), worth up to $3,600 over the plan lifetime, while British Columbia provides a single payment of $1,200 under its Training and Education Savings Grant.

When a lot might not be enough

While these amounts might seem like a lot, it may be important to keep in mind that the cost of four years – or more – of post-secondary education can also add up. The following graph illustrates capital accumulation in an RESP where total annual contributions of $5,000 have been made for two children living in Ontario. Assumptions for the purpose of this simulation include that the children were born five years apart and that the RESP contributions began when the second child was born. These contributions qualify for annual grants of $500 per child but not for the Canada Learning Bond. It is also assumed that the two children will not live with their parents while at school. Finally, the assumption for the annual return is 4%, for annual inflation is 2% and for the annual increase in tuition fees is 4.5%. (These calculations were done using the tool available on the Get Smarter About Money website.)

As we can see, the accumulated assets may look substantial, but they decrease quickly once the first child begins his or her studies. By the time the second child is ready for post-secondary education, there is insufficient capital.

Bar graph showing asset growth in an RESP based on assumptions described in the story. At year 12, the assets amount to almost $100,000. However, these savings decrease quickly starting in year 13, and enter negative territory by year 18.

To avoid this type of problem, it might be a good idea to do some careful planning around RESP use, especially the contribution amount, when to start contributing, and the choice of investment vehicles.

In other words, invest a little time to better invest your money.

The following sources were used to prepare this article: 
Get Smarter About Money, “RESP Savings.”  
Government of British Columbia, “British Columbia Training & Education Savings Grant Information.” 
Government of Canada, “Registered Education Savings Plans (RESPs)”; “Registered Education Savings Plans (RESPs).” 
Statistics Canada, “Tuition fees for degree programs increase in 2020/2021”; “Tuition fees for degree programs: Interactive tool ».