Monthly Archives: April 2015

Free money for the education of your child: RESPs

partyI came to Canada in 1998 to study. I found that Canada’s education system offered the best value for my money. At that time a school year cost $3,000 CAN. The same school year in the U.S. cost over $20,000. The difference in price is because the Canadian government subsidizes secondary education.

Not only is the Canadian education system more accessible, but the government also creates tax incentives to make it easier for Canadians to save for higher education and they contribute by depositing cash into the student’s education savings account.

The vehicle by which the Canadian government helps Canadians is called the Registered Education Savings Plan (RESP)

How do RESPs work?

Usually the parent will open an RESP account at a financial institution ( a bank, a mutual fund company, a broker, or an investment house) and names the child as the beneficiary. Once the account is open, the parent can start making contributions (maximum contribution $50,000).

Every year, for every $2,500 the parent contributes, the government of Canada will contribute an additional $500. Can you imagine? This is a guaranteed 20% return on your investment. The government will contribute up to $7,200 over the lifetime of the account. This is FREE money. $7,200! If you are considered a low income family, the government will contribute up to $600 per year.

When the child goes to school, the money can be withdrawn under his name. Since the child has little or no income, all of the gains can be withdrawn tax free.

More FREE money.

The government of Canada will add another $2,000 free to low income families, through the Canada Learning Bond  ( the CLB is a grant paid by the government of Canada to assist low income families with saving money for their children’s post-secondary education) as long as the money is used towards the education of a child. If the child decides not go to school, the government will claim back its money.

The provinces want to help out as well.

There’s no ending to this country’s generosity. Not only does the federal government want to help people get a secondary education, but some provinces want to help out as well. Here are a few programs sponsored by the provinces.

Saskatchewan Advantage Grant for Education Savings (SAGES):

The Government of Saskatchewan provides a grant of 10% on contributions made into a Registered Education Savings Plan (RESP) to a maximum of $250 per child per year, up to $4,500 per child. Wow, so you get $500 free money from Canada and $250 from Saskatchewan. This is a total of $750 free money if you put aside $2,500 from your own pocket. This is the equivalent of 30% return on your money.

Québec Education Savings Incentive:  The government of Quebec has a plan similar to the Saskatchewan plan: $250 free money per year up to $3,600 per child.

Hypothetical scenario.

Maria has a newborn baby and wants to save for the baby’s education. She opens an account at her local bank. She deposits $2,500 every year for 15 years. As soon as she deposits the money, the government of Canada contributes $500 and the government of Quebec contributes another $250. Assuming that she can get an 8% return on her investment, at the end of the 15 years, she would have about $95,000 for the education of her child. $37,000 which she invested out of her pocket, $11,250 contributed by the government, and $46,750 in capital gains.

The child will withdraw the amount as needed when going to school and the capital gains of the amount would be taxable under his name. In this case, the capital gains are about $46,750. Since the child has no job or only a part-time job, his taxes will be almost zero. What a great opportunity. $46,750 Tax free gains.

Conclusion: If you are a parent, investing in an RESP should be a fundamental part of your financial planning. Nowhere else can people get a guaranteed 30% return for their investment and all the gains tax free.

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