Are RESP contributions tax-deductible?
- Registered Education Savings Plans (RESPs) provide a tax-sheltered way to save for a child’s education.
- You don't get a tax deduction when you put money into an RESP. Unlike an RRSP, RESP contributions won't reduce your taxable income.
- That's because the money you contribute has already been taxed through your paycheque. These are called after-tax dollars.
- Government grants and investment earnings grow tax-free inside the account until withdrawn as Educational Assistance Payments (EAPs).
- EAPs are taxed in the hands of the child, not the subscriber.
Saving for a child’s future education is a big financial commitment, and many Canadians look for ways to make their savings go further. If you’re contributing to a Registered Education Savings Plan (RESP) or considering opening one, you may be wondering how the account fits into your overall tax strategy.
RESPs are one of the most popular education savings tools available to Canadians, but the tax treatment of contributions and withdrawals isn’t always straightforward. Understanding the rules can help you make more informed decisions about how to save for future education expenses and take advantage of the benefits available to you.
Here’s everything you need to know about how RESP contributions, investment growth and government grants are treated at tax time.
In this article
Understanding RESPs: What’s taxable?
Both investment income earned in an RESP and government grants are taxable, but only when they’re withdrawn to pay for educational expenses. Withdrawals of personal contributions aren’t taxed because they’re made with after-tax dollars. Unlike Registered Retirement Savings Plan (RRSP) contributions, RESP contributions aren’t tax-deductible. However, the RESP is still a powerful tool to build education savings, with three main benefits for Canadians:
- Tax-deferred growth: Money invested in an RESP is sheltered from tax, meaning it can continue to grow tax-deferred while in the account.
- Withdrawals are taxed in the hands of the child: Unlike other registered accounts, the beneficiary (the child) is taxed on withdrawals used for educational expenses, not the subscriber (the person who opens and manages the RESP, such as a parent or grandparent). However, because students are typically in a lower tax bracket than the subscriber, they will likely pay little to no tax on withdrawals. Tuition tax credits can also help reduce the student’s overall tax bill.
- Government grants: Opening an RESP allows you to benefit from government grants, such as the Canada Education Savings Grant (CESG). The federal government pays a basic CESG amount of 20% on annual contributions to your RESP, up to a yearly maximum of $500 ($1,000 if there’s unused grant room) and a lifetime maximum of $7,200 per beneficiary. Some families may be eligible for the Canada Learning Bond (CLB) as well, which is a federal education savings grant for lower-income households. In addition, certain provinces and territories offer incentives to families for opening an RESP.
Is investment growth in an RESP taxable?
Investment growth in an RESP is taxable, but only when it’s withdrawn, allowing your savings to benefit from the power of compounding. This helps your contributions and government grants grow until they’re needed to fund post-secondary education.
Money from government grants and investment earnings is withdrawn as Education Assistance Payments (EAPs), which can be used to fund educational expenses. As previously mentioned, these withdrawals are taxed in the hands of the beneficiary. However, accumulated investment income that hasn’t been withdrawn through EAPs can be paid out to the subscriber and is taxed at their marginal tax rate (and an additional 20% tax or 12% for Quebec residents, with some exceptions).
How RESP over-contributions are taxed
RESPs have a lifetime contribution limit of $50,000 per beneficiary, with no annual contribution limits. It’s important to note that this limit only applies to personal contributions; government grants don’t impact contribution room. If you exceed the lifetime limit, the excess amount will be taxed at 1% per month until it’s withdrawn. Tax on overcontributions must be paid within 90 days after the end of the calendar year in which the overcontribution occurred.
It’s important to keep track of your contributions, especially if there are multiple accounts open for the same child. You can see how much you’ve contributed by reviewing account statements provided by your financial institution.
How to report RESP amounts on your tax return
Once you withdraw money from an RESP to pay for the beneficiary’s educational expenses, the student will receive a T4A slip that includes the total amount received in EAPs for the tax year. The beneficiary must record the amount from this tax slip as income on their tax return.
As discussed above, personal contributions, which are withdrawn as Post-Secondary Education payments (PSEs), don’t need to be claimed on your tax return since they are made with post-tax dollars. However, the same isn’t true for Accumulated Income Payments (AIPs), which is investment growth paid out to you when the money is no longer being used for the beneficiary’s post-secondary education. In this case, AIPs must be reported as income on your T4A slip in the year you receive them. You can also transfer up to $50,000 in AIPs to your RRSP if you have available contribution room.
FAQs
Are RESP withdrawals taxable?
Your personal contributions are not taxable because they’re made with after-tax dollars, but government grants and investment earnings are taxed in the hands of the beneficiary when withdrawn as EAPs. However, AIPs are taxed in the hands of the subscriber unless transferred to your RRSP, assuming you have available contribution room.
Do you report RESP grants on your tax return?
You, the subscriber, don’t need to report RESP grants on your tax return. However, the beneficiary will have to report them on their tax return once the funds are withdrawn as part of an EAP.
What happens if the child doesn’t attend school?
If the child doesn’t attend post-secondary school, you have a few options. You can keep the RESP open for up to 36 years in case they change their mind, transfer the funds to a sibling’s RESP, transfer up to $50,000 to your RRSP tax-deferred, gift the funds to an educational institution or close the account. Any unused grant money must be returned to the government.
What is the RESP lifetime contribution limit?
The RESP lifetime contribution limit is $50,000 per beneficiary, with no annual limits. This includes funds put into all RESP accounts that may be set up for that child. However, government grants are not included in the contribution limit.
