RESP is a tax-sheltered education savings accounts that can help parents save for their children's education after high school. One of the benefits of RESP comes from the government incentives such as Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB). Another advantage comes from the tax benefits through income split and tax-deferral.
Canada Education Savings Grant (CESG)
To encourage parents to save for their child's post-secondary education, the government pays a basic CESG of 20% of annual contributions to a maximum CESG of $500 for each child.
The government also pays an additional 10% or 20% on the first $500 contributed to a RESP for a child. The additional amount is based on the net family income of the child's primary caregiver.
Canada Learning Bond (CLB)
The government also provides an additional incentive, the Canada Learning Bond (CLB), to help modest-income families contribute to an RESP. For families entitled to the National Child Benefits (NCB) supplement, the CLB will provide an initial $500 to children born on or after January 1, 2004 when an RESP account is opened. Thereafter the CLB will also pay an additional $100 annually for up to 15 years for each year the family is entitled to the NCB supplement for the child.
Tax Benefits
Although contributions to an RESP are not tax deductible, the investment growth is tax deferred until the fund is withdrawn. When funds are withdrawn, the contributions are tax free since they have already been taxed. The investment growth is taxed at the recipient’s tax rate. The recipient is typically a post-secondary student and his or her tax rate is usually low due to low income. Therefore tax saving can be achieved.
Government incentives and the tax benefits make an RESP an attractive vehicle for saving for a child's post-secondary education. RESP should be incorporated in the overall family tax planning strategy.
