Maximize RESP Grants Before Year-End
One great advantage of Registered Education Savings Plans (RESPs) is that contributions are topped up by 20% via the Canada Education Savings Grant (CESG) each year.
If you miss or skip a year, the CESG entitlement can be carried forward. You can only claim one year of carry-forward at a time though. It is important to remember this as year-end approaches.
RESP Basics
Every Canadian child under 18 accrues a CESG entitlement each year, retroactive to 1998. Until 2007, the maximum RESP contribution to receive CESG was $2,000. Thereafter it has been $2,500 per year.
There is no annual contribution limit, but the maximum lifetime amount is $50,000. While CESG provides a matching contribution of 20% on the first $2,500 contributed each year, unused entitlement can be carried forward. Therefore, the maximum CESG you can claim (per beneficiary) is $1,000 per year. Note – the grants themselves are not included in the lifetime RESP limits.
RESP Planning Using Carry-Forward - Example
Steve & Kelsey have a child, Josephine age 3 (born in 2017). They recently received a $15,000 gift from Steve’s parents to help save for Josephine’s education, and decided to open an RESP for her. Steve & Kelsey can contribute $2,500 (as 2020 contribution room) plus another $2,500 (as 2017 contribution) for a total of $5,000 and will receive a $1,000 grant toward Josephine’s education.
They could contribute the full $15,000 now but would not receive any grant money beyond a $5,000 contribution. The following table illustrates this point:
|
Lump Sum Approach |
||||
|
Year |
Age |
Contribution |
Actual |
CESG |
|
Limit |
Contribution |
|||
|
2017 |
0 |
$2,500 |
$0 |
$0 |
|
2018 |
1 |
$2,500 |
$0 |
$0 |
|
2019 |
2 |
$2,500 |
$0 |
$0 |
|
2020 |
3 |
$2,500 |
$15,000 |
$1,000 |
|
2021 |
4 |
$2,500 |
$0 |
$0 |
|
2022 |
5 |
$2,500 |
$0 |
$0 |
|
TOTAL |
|
|
$15,000 |
$1,000 |
Instead, Steven & Kelsey’s financial planner suggests that they stagger the contributions over 3 years, to maximize the grants, as follows:
|
Staggered Approach |
||||
|
Year |
Age |
Contribution |
Actual |
CESG |
|
Limit |
Contribution |
|||
|
2017 |
0 |
$2,500 |
$0 |
$0 |
|
2018 |
1 |
$2,500 |
$0 |
$0 |
|
2019 |
2 |
$2,500 |
$0 |
$0 |
|
2020 |
3 |
$2,500 |
$5,000 |
$1,000 |
|
2021 |
4 |
$2,500 |
$5,000 |
$1,000 |
|
2022 |
5 |
$2,500 |
$5,000 |
$1,000 |
|
TOTAL |
|
|
$15,000 |
$3,000 |
This staged approach allows for $2,000 additional grants compared to the lump sum approach ($3,000 vs $1,000).
In our example, Steve & Kelsey can temporarily invest the money not allocated to RESP into TFSA until grant room becomes available, provided they have TFSA room to do so, or into another non-registered investment.
Contribution and Grant Deadlines
The annual contribution deadline is the end of the calendar year – unlike RRSPs, where there is a 60-day grace period following year-end. As for CESGs, these are paid out only to the end of the year in which the child turns 17.
Seek Advice
It is important to discuss your unique situation with a qualified Financial Planner to discuss your best overall strategy. Every situation is unique. Hopefully, this sheds some light on tactics to help you take full advantage of RESPs.
December 2020
CHRIS J. VEILLEUX CFP®, CLU, FMA, FCSI, CPCA
President & CEO – Prairie Wealth Planning Consultants
Prairie Wealth Planning Consultants is an independent financial advisory firm based in Brandon, MB.