RESPs are simple, regulated accounts which are used for maintaining an investment and future savings for the purpose of a child’s post-secondary education. An RESP can be invested in numerous ways, but if used for higher education tuition expenses, it will be tax-free from any investment gains.
There are three types of RESPs:
Individual RESP: RESPs can be opened by a parent, grandparent, family friend or a benefactor. However, both the child and the opener has to be a Canadian. Keep in mind that RESPs are not usually transferrable, but can be transferred to a sibling.
Family RESP: In a family plan, you can have one or more beneficiaries, although they all have to be related to the contributor (or be formally adopted). You can open a family RESP for your child and your nephews, but you can’t include your son’s best friend from daycare. The beneficiaries also have to be under 21 when they’re added to the plan.
Group RESP: In a group plan, one single child is the beneficiary, and that child does not have to be related to you. However, since many people are contributing to this plan, the beneficiary shares the pooled earnings of investors with children of the same age. Group plans tend to have more restrictions and rules than other plans.
Here is a general overview of how RESP works:
- Subscriber enters into RESP contract with the promoter and registers the names of the beneficiaries.
- Subscriber then makes the contribution to RESP. If the RESP qualifies for Government grants like Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), or any designated provincial education savings program, it will be included in the application.
- The promoter of the RESP administers the investment and as long as the income remains in the RESP, it’s not taxed. The promoter also monitors whether or not payments are made in accordance with the terms of the RESP.