Yr Finish RESP Concerns – Tax

Canada:

Year End RESP Considerations

22 December 2020

Barrett Tax Law

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While many Canadians are aware that the government provides
annual grants on contribution to RESPs, many people are simply
unaware of the small but important nuances in maximizing those
grants. The Canada Education Savings Grant (“CESG”) is
currently limited to 20% of the annual RESP contributions, up to a
maximum annual amount of $500 per child. To receive the maximum
amount, one should contribute $2,500 annually. If the amount is not
maxed out, there may be a limit on your ability to carry forward
these grants. While the carry forward deadline is technically once
the child reaches 17, it can be very difficult to catch up on
utilizing any unused grants. This is because one may only go back
one year at a time to make up for missed contributions; the
accumulated carry forward cannot be utilized simultaneously. If you
begin making up the contributions too late, you may miss out on
unused carryforwards.

For example, if you have been contributing $1,000 annually, then
you have been receiving $200 in grant money, effectively losing out
on the additional $300 of possible grants for each year. You may
only catch up on receiving grants one year at a time, meaning that
in the current tax year you may contribute an additional $1,500 for
last year (making it a $2,500 total annual contribution) and an
additional $1,500 for this year, as to maximize the annual grants
to $500 per child per year.

Keep in mind that while there is no annual contribution limit,
there is a lifetime contribution limit set at $50,000 per child.
There is also a lifetime grant limit of $7,200. So, of the maximum
lifetime contribution limit of $50,000, only $36,000 would qualify
for the 20% CESG grant to reach the lifetime $7,200 grant
limit.

If you begin catching up when your child is young, it may still
be possible to play catch up. If however, you wait until your child
is much older, it may be impossible to maximize the annual grant
amount of $500 per child and lifetime grant amount of $7,200 per
child. Not to mention, the sooner your child has funds accumulating
in the RESP, the greater the opportunity for the investment to grow
on a tax-deferred basis.

December 31 st is fast approaching. Take a few minutes to check
in on your RESP contribution amounts and ask whether you have been
maximizing the CESG grant. If you have not, find out what carry
forward is available, and make a plan to catch up on maximizing the
tax-deferred investment growth and what is essentially free
government money!

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.