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.