Nov 19, 2019
How RESP Grants Work
Rob:
Hey guys, today we're talking about the RESP grant, how it works, when it makes sense, how much you can get, what the limits are, and how to take advantage of it.
I'm Rob Tétrault from robtetrault.com, head of the Tétrault Wealth Advisory Group here at Canaccord Genuity Wealth Management. To my right, your left is Adam Buss, Senior Wealth and Estate Planner here at Canaccord Genuity Wealth Management. Adam, we're thrilled to have you. Thanks for coming in.
Adam:
Thanks for having me again.
Rob:
Alright, RESP grants. Adam, first of all, how do they work? What's the basic percentage and what do you get when you make an RESP contribution? Or first of all, what is an RESP?
Adam:
Whoa, that's a great question. So Registered Education Savings Plan, the grants is kind of the whole concept as to why you should put money into an RESP. You get 20% of free government money added to the RESP account for every contribution that you make.
Rob:
All right, so I put 1000 bucks in…
Adam:
They’ll throw on $200 extra for you, added to the pot to use towards future education.
Rob:
Do I get that as cash or does that go into the account?
Adam:
Goes into the account.
Rob:
Okay, I knew that. Just testing!
Adam:
But it's good. But, of course there's maximums. They're not going to say, oh, okay, well Rob put a hundred thousand dollars into the RESP, let's give him 20 grand. That's not how it works.
Rob:
There's a maximum per year.
Adam:
There's a maximum per year. And there's also a lifetime maximum.
Rob:
The maximum per year is…
Adam:
Is 20% of up to $2,500 contribution.
Rob:
$500 in grants.
Adam:
$500 per year. However, you can make up for past unused contribution room of up to $5,000 that you put in, the government will throw in $1,000.
Rob:
All right, so that's per child.
Adam:
Per child.
Rob:
I'm lucky I have four kids. I could in theory put $10,000 into my RESP per year and I would get $2,000 of grants every single year.
Adam:
Correct.
Rob:
And if I forgot to do it last year, I could do $20,000 this year,
Adam:
Absolutely.
Rob:
Okay. And I'd get $4,000.
Adam:
But if you decided to do $21,000, they would not give you any additional grant money on that extra thousand dollars.
Rob:
Now how would that be set up for me if I wanted to do it that way. That would likely be set up as a RESP family plan.
Adam:
Correct.
Rob:
We put all the four kids – Alexandre, Arielle, Angéline, Aubrie – all in one plan and then they all get to use the grants effectively.
Adam:
Yeah. The best part is any of the children can use that grant money when they go to post-secondary education.
Rob:
If one of your, kids decides they don't want to go to post-secondary education, you don't lose that grant.
Adam:
Don't lose it.
Rob:
Very interesting. I'm sorry, go ahead.
Adam:
Yeah, sorry. I did mention there is a lifetime maximum as well. It's up to $7,200 of grant money per child.
Rob:
Okay.
Adam:
So they do cap it.
Rob:
Oh, okay. So $7,500, that'd be like $37,500 of contributions. Okay. So that's quite a bit of contribution amount. Yeah. All right. Clearly this can’t be tax free, right?
Adam:
It's after tax dollars that go into the RESP account.
Rob:
Okay.
Adam:
You pay tax on it and then you put the money into it. Unlike in RRSP, which is often confused. And when you take the money out down the road is when it's taxable as withdrawn. So your money you put in is withdrawn, tax free. The government money and any income or growth has been generated in the account is taxable to the beneficiary when withdrawn.
Rob:
We always like to say the grants and the growth.
Adam:
Grants and the growth.
Rob:
The grants and the growth are taxed. In theory, the way this works out is, in my mind anyways, is hopefully the kids have a much lower income bracket than you do. And when they're pulling it out, most of it is likely tax-free.
Adam:
Yeah. Ideally they're in university, they're poor students and don't have necessarily that income level. And they also probably have additional write-offs from education credits.
Rob:
Right, right.
Adam:
Essentially, they hopefully will pay as close to zero taxes on that money as possible.
Rob:
Okay. It's the first year, my son's in university, we submit a confirmation of enrollment. This could be for pretty much any post-secondary education.
Adam:
Yeah. There is a list on the government of Canada website as to qualify post-secondary education institutions. It was a little bit more limited when the program came out, but it's pretty wide variety now, including some international schools as well.
Rob:
International, some trades.
Adam:
Yeah.
Rob:
Some traditional universities, colleges, those are all candidates.
Adam:
Fairly flexible.
Rob:
And I know there's a limit in your first 13 weeks.
Adam:
I think it's $5,000 if I remember correct.
Rob:
$5,000 bucks your first 13 weeks, and after that effectively the sky's the limit. Let’s talk about the Canada learning bond and how that works. So that would be for lower income families?
Adam:
Yeah. So that is additional money that they throw into the pot. It has nothing to do with your contributions, so it doesn't even matter if you throw any money into it. They will add money to the RESP free of charge based on your income level.
Rob:
If you open the RESP,
Adam:
If you open the RESP, and they'll continue to do so and as long as your family income is within a certain level.
Rob:
How long can I contribute for my kids RESPs, does it end at some point? Can I contribute all the way until they're 18?
Adam:
Generally, you would contribute to the end of the year that they turned 17 because that is the last year that you can qualify for the grant money. Really you can contribute beyond that. But what's the point if you're not going to get the government money?
Rob:
Absolutely. How long do these things last? I imagine I have to pull the money out at some point.
Adam:
There are different restrictions in place. It depends as to when the plan was established, how old the kids are. Those are all different things that we want to work with our clients on. Hopefully take out the money early on when the first child goes to school, and that way we can close it later on.
Full Video & Blog Article on How an RESP Works, and RESP Withdrawal Rules
Rob:
It's basically a really neat tax arbitrage strategy.
Adam:
Absolutely is great.
Rob:
Yeah. What happens if none of my kids go to university?
Adam:
Okay, well if none of your kids go to school, you still get your money back. You essentially get all the growth and income that was generated on your money. All the government money goes back to the government. That's only fair. Your kids didn't go to school.
There is a penalty that the government does charge, which is approximately 20% which equates to the growth on the government money as they put in 20%... anything that you take out and you get your money back, tax free, any income is you can either roll to your RRSP if you have the enough room in your RRSP, or where you take it out as taxable income.
Rob:
The RESP grant, pretty neat stuff. Makes sense for a lot of families out there. Some of them super important to consider too. I would say be an important part of a financial plan, right? When you're building a financial plan, you want to factor in this and any other education goals, right?
Adam:
Yeah. If the goal is to help the kids pay for post-secondary education costs is a fantastic program to do so.
Rob:
All right. Adam, thanks so much for joining us today. Adam Buss, Senior Wealth and Estate Planner here at Canaccord Genuity Wealth Management. If you have questions on this or your portfolio, go to speaktorob.com, and book a no obligation consultation.