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In this Episode, James Parkyn & François Doyon La Rochelle discuss RESPs. Starting from Grants, the role of grandparents, withdrawals and what happens if your child doesn’t go to post secondary school.
François Doyon La Rochelle: You’re listening to Capital Topics, episode #92! This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor. Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio managers with PWL Capital. In our podcast today we will discuss RESPs. Starting from Grants, the role of grandparents, withdrawals and what happens if your child doesn’t go to post secondary school. Enjoy! François Doyon La Rochelle: One of the biggest financial challenges facing parents today is the rising cost of post-secondary education. Tuition, housing, books, transportation, and living expenses can easily add up to tens of thousands of dollars over the course of a degree, diploma, or trade program. Fortunately, however, Canada has a generous education savings program: the Registered Education Savings Plan, or RESP. James Parkyn: Yes, François, but despite the RESP being around for decades, many Canadians still don’t fully understand how it works, and they often don’t maximise contributions. Parents with young children have many competing priorities for their hard-earned money, and they often prioritise RRSPs, TFSAs, or paying down their mortgages over contributing to an RESP for their children. François Doyon La Rochelle: Exactly, so today, James, we will discuss contribution strategies, government grants, the role that grandparents can play, withdrawal planning once a child starts school, and finally what happens if the child decides not to pursue post-secondary education. James Parkyn: Exactly, Francois, RESPs are quite complicated. Often in client meetings, when we discuss RESPs, it can easily take up a good hour just to go through the rules. And that’s understandable because parents are passionate about their children’s education. Furthermore, I would add, Francois, that how to optimize the decumulation phase is also misunderstood. But despite all that complexity, we believe that RESPs remain one of the most valuable savings tools available to Canadian families. François Doyon La Rochelle: Totally, so, James, let’s start with the basics. What exactly is an RESP? James Parkyn: Well François, an RESP is a tax-advantaged savings account designed to help families save for a child’s post-secondary education. The investments in the account grow on a tax-deferred basis, but in addition to that, the government will deposit generous grants based on qualifying contributions. François Doyon La Rochelle: I would add to that, James, that there are three parties involved in an RESP. First, there’s the subscriber; that’s the person opening and contributing to the account. Second, there is the beneficiary, the future student. And finally, the promoter, which is simply the financial institution where the RESP is held. James Parkyn: François, one thing that surprises some people is that the subscriber doesn’t have to be the child’s parent. A grandparent can open an RESP, as can another family member. So an uncle or an aunt can open an account for a niece or a nephew. The beneficiary simply needs to be a Canadian resident and have a Social Insurance Number. We normally recommend opening an RESP as soon as possible after the child is born in order to maximize the benefit from the magic of compound interest working as early as possible on the contributions and on the government grants. François Doyon La Rochelle: James, there are also different types of RESP plans. Individual plans have one beneficiary, while family plans can have multiple beneficiaries who are related by blood or adoption to the subscriber. James Parkyn: Exactly, François, and for families with multiple children, we generally prefer family plans because they offer greater flexibility. Life rarely unfolds exactly as planned; one child may pursue graduate studies while another could choose a shorter program. Family plans therefore provide the flexibility in how the accumulated savings can be used. François Doyon La Rochelle: There are also group RESP plans, but we generally don’t recommend those plans. They often come with more restrictions, higher fees, and less flexibility than individual or family plans. James Parkyn: I agree, François. From an investment perspective, an RESP can generally hold the same types of investments you would find inside an RRSP or TFSA, such as individual stocks, bonds, ETFs, mutual funds, GICs, and high-interest savings products. As always, the investment mix, the allocation between stocks and bonds, should reflect the risk tolerance, the risk capacity, and time horizon. A two-year-old child has a longer investment horizon; therefore, they can potentially have a riskier asset mix than a seventeen-year-old who is about to start university. François Doyon La Rochelle: Now James, let’s talk about what really makes the RESP attractive and different from an RRSP or a TFSA. I am talking about the generous government grants. James Parkyn: Absolutely François. The Federal Government gives the main grant. It is technically called the Canada Education Savings Grant, or CESG. This Federal grant amounts to 20% of the RESP contributions made by the subscriber, typically the parent. So the RESP rules are structured with Caps on the amount of grants that are paid out. The annual maximum grant is $500, which relates to a $2,500 contribution. An exception to this is that you can catch up to one year if you have not been making the contributions since the child beneficiary was born. So think of it, this is like a guaranteed 20% return on your contributions. François Doyon La Rochelle: Yes, and some provinces also offer grants, here in Quebec, there’s the Quebec Education Savings Incentive or QESI, which adds another 10%, or $250 on the same $2,500 of contribution. James Parkyn: So, although these grants are a one-time-only event, a Quebec family contributing $2,500 annually for a child would see $750 deposited into the RESP from government grants. So a total of $3250 is available to generate investment returns. François Doyon La Rochelle: So, James, the grants represent an immediate return of 30%; this is very generous and will generate significantly better returns over the long term.James Parkyn: Totally François. We should talk about lifetime contribution limits now. The limit is $50,000 per beneficiary and a lifetime grant limit of $7,200 at the federal level and $3,600 from the Quebec government. So, the grant limit means that only contributions up to $36,000 generate or attract government grants. These grants are available until the end of the calendar year when the beneficiary turns 17. However, the RESP was designed to encourage long-term savings for post-secondary education. If you wait too long to set up and contribute to an RESP, there are specific rules that limit eligibility for grants if you wait until the child is 16 or 17. Beneficiaries aged 16 and 17 can only receive the Canada Education Savings Grant (CESG) if specific prior contribution milestones were met before the end of the calendar year they turned 15. François Doyon La Rochelle: That’s a good point, James. Another point that is important is that if a family misses a year of contributions, you can catch up. James Parkyn: That’s a great point, François. As you mentioned earlier, the reality is that many young families are juggling a mortgage, daycare costs, and all the other expenses that come with raising children. If they’re unable to maximize their RESP contributions in a given year, they shouldn’t panic. Unused grant room is carried forward and can be claimed in future years. The rule is that there’s a limit to how quickly you can catch up in any one year. The Federal grant is limited to a maximum of $1,000 per year and $500 for Quebec grants. In practical terms, that means only contributions up to $5,000 in a year allow you to earn both the current year’s grants and one year’s worth of missed grants. François Doyon La Rochelle: Correct, James, but the key message here is don’t miss too many years cause otherwise you won’t be able to catch up. The earlier you start, the more years the grants and your contributions start compounding. And even if you’re unable to contribute the full $2,500 each year, making a small contribution is generally better than doing nothing. Now, James, before we move on, let’s talk about a strategy for families who have excess capital; it’s called super-funding. James Parkyn: Yes, François, this is actually a fairly simple idea. It involves making the maximum $50,000 in total allowed contributions. Obviously, this strategy only applies to those parents who can afford it. But there are technical rules you will have to follow in order to receive the maximum federal and Quebec provincial grants. You need to contribute annually the $2500. If you start in the year the child is born, you will reach the maximum Federal grants of $7200 at age 14. This requires a total of $36,000 in contributions. So, considering the RESP total contribution limit is $50,000, this means that parents can do $14,000 in additional contributions that will never attract additional government grants, regardless of when it’s contributed. François Doyon La Rochelle: So, for families who have enough resources, the super-funding strategy is to contribute some or all of that $14,000 early in the child’s life rather than waiting until later years. The benefit here isn’t the additional grants but the extra years that this money will compound tax-sheltered in the portfolio. Using PWL Capital’s financial planning assumptions, which we discussed in our podcast #90, a portfolio invested 60% in equities and 40% in bonds has an expected long-term return of approximately 5.73% per year. Given this expected return, this additional $14,000 invested when the child is born and growing for 18 years could potentially grow to about $38,000. James Parkyn: In other words, roughly $24,000 of growth simply because that money had eighteen years to compound tax-sheltered. François Doyon La Rochelle: Now this strategy is certainly not for everybody, but for grandparents wanting to help with education costs, families receiving an inheritance, or families with excess savings, I think this strategy is worth considering. This said, for most families, consistently contributing $2,500 per year and collecting the grants is still an excellent approach. Based on the same 60/40 portfolio and PWL’s expected return from our previous example, if the subscriber makes an annual contribution of $2,500 per year and collects the grants, they could end up with roughly $90,000 per child when they turn 18. Now James, speaking of grandparents, this brings us to another question we hear quite often. Can grandparents help fund an RESP? James Parkyn: Absolutely, François, grandparents can either open their own RESP for a grandchild or gift funds to a parent who already has an existing RESP. Now, before grandparents rush out and open RESPs for all their grandchildren, there are a few things they should know. They should understand that the contribution limits and grant limits apply to the beneficiary, not to the individual RESP account. So if parents and grandparents are both contributing to separate accounts for the same child, this could lead to overcontributions and possible tax penalties. François Doyon La Rochelle: Correct: James and families can quickly lose track of contribution limits and grant eligibility, and this creates unnecessary complexities. James Parkyn: Imagine a family with several grandchildren where multiple grandparents have opened separate plans. Over time, this situation can become a nightmare to coordinate. In addition, there are also estate planning considerations. If grandparents are the subscribers, they remain responsible for the accounts, and the families will eventually have to deal with the situation if the grandparents become incapacitated. In addition, they will have to plan in their wills for successor’s subscribers. François Doyon La Rochelle: Exactly, James, and that’s why we prefer the simpler solution where grandparents gift funds to the parents’ existing RESP. It reduces complexity, but it still allows grandparents to play a meaningful role in funding their grandchildren’s education. So now that we have covered the basics of RESPs on the contribution side, let’s look at how to withdraw the funds in the most tax-efficient way when the child goes to post-secondary school. James Parkyn: Well, Francois, after many years of contributions, grants received, and earnings on the investments, the time comes when the beneficiary starts post-secondary education. This requires careful withdrawal planning to optimize the tax benefits. François Doyon La Rochelle: Correct, James, the comparatively easy part was contributing to the RESP; the withdrawal part is even more complicated than people expect and, unsurprisingly, that’s often where some of the biggest mistakes are made. James Parkyn: Yes, François, we’ve seen situations with new clients that are unfortunate. Most people focus heavily on the accumulation phase of the RESP. There’s often much less effort put into how to optimize withdrawals when a beneficiary starts post-secondary education. The good news is that RESP withdrawals can be very tax-efficient. The bad news is that if you don’t have a plan, you could end up leaving grants behind, creating unnecessary taxes, or simply withdrawing the money in a less tax-efficient manner. François Doyon La Rochelle: So, let’s start with the basics. Our listeners need to understand that not all the money inside an RESP is treated the same way when it’s withdrawn. James Parkyn: Exactly, Francois, I think they need to understand that the money accumulated in the RESP for each beneficiary belongs to three different buckets. The first bucket is the contributions made to the plan by parents, grandparents, or anyone else. The second bucket contains the government grants that accumulated over the years. And the third bucket contains the investment earnings generated inside the account. This would include capital gains, dividends, and interest. François Doyon La Rochelle: Understanding these three buckets is important because the withdrawal rules are different for each one. James Parkyn: Correct, in our practice, one of the first things we do when a child is approaching post-secondary education is calculate how much money in the family plan should be allocated to each beneficiary. From there, we figure out how much goes into each of the 3 buckets. Once we know that, we can start designing a tax-optimized withdrawal strategy that makes sense for the family’s situation. François Doyon La Rochelle: Yes, James, but before any withdrawals can happen, the student must provide proof of enrollment in a qualifying educational program, whether it’s a university, college, or other designated educational institution. Once that’s done, there are two categories of withdrawals available. The first is called a Post-Secondary Education Withdrawal, or PSE. These withdrawals come from the original contributions made to the RESP. Since those contributions were made with after-tax money, they’re not taxable when withdrawn. The second category is called an Educational Assistance Payment, or EAP. These payments consist of the government grants and the investment earnings accumulated in the RESP. Unlike PSE withdrawals, EAP withdrawals are taxable income. However, they’re taxable in the hands of the student rather than the parent. James Parkyn: Yes, and that’s one of the major planning opportunities. Many students have relatively low income while attending school. Between tuition tax credits, basic personal tax credits, and modest employment earnings, a lot of students may pay little or no tax on EAP RESP withdrawals. François Doyon La Rochelle: Exactly, James, that’s why in many situations it makes sense to prioritize EAP withdrawals over PSE withdrawals. We’re essentially trying to withdraw the taxable portion of the RESP while it can still be taxed at the student’s low tax rate. It’s the most tax-efficient way to access the grants and the investment earnings. James Parkyn: Something else that families should consider is the duration of the student’s studies. Withdrawal strategies will differ depending on the type of program the child will be enrolled in. Planning for an apprenticeship program compared to graduate studies will obviously differ. François Doyon La Rochelle: Totally, before creating a withdrawal plan, parents should sit down with their child and discuss a few important questions. Questions to consider are how many years of education are expected, what will the annual costs look like, will the child be living at home, will they have summer employment, or will they be doing paid internships or co-op work? All of these factors will influence how much should be withdrawn each year. James Parkyn: Yes, and there are also rules around how much can be withdrawn from the EAP portion when studies begin. During the first 13 weeks of enrollment, the limits on EAP withdrawals are $8,000 for full-time students and $4,000 for part-time students. After that initial period, the rules become much more flexible and larger withdrawals are generally possible. However, keep these annual EAP withdrawals below the threshold limit, which is $29,459 for 2026. Otherwise, you may need to show receipts and proof of expenses. François Doyon La Rochelle: One of the concepts we often discuss with clients is that EAP withdrawals should generally be treated as a “use them before you lose them” type of asset. Remember that the contributions always belong to you as the subscriber, and if they’re still sitting in the RESP years later, they can generally be withdrawn without any tax consequences. James Parkyn: Yes, Francois, but for the EAP withdrawals it’s a different story. If the student completes their education or quits school and those amounts haven’t been fully withdrawn, the rules become much more restrictive. That’s also one reason why we generally want families in the early years of post-secondary education to prioritize withdrawals of EAP. François Doyon La Rochelle: That’s correct, James, but every situation is different. The sensible approach is fairly straightforward: take full advantage of the grants, use the investment earnings efficiently, and keep taxes to a minimum. James Parkyn: François, another point that surprises many parents is that they often assume that every dollar withdrawn from the RESP must be spent directly on tuition or textbooks. François Doyon La Rochelle: Yes, that’s a very common misconception, but education expenses go far beyond tuition. Students may have living expenses, transportation costs, technology expenses, housing costs, and many other needs. And in some situations, there may even be excess funds remaining after those expenses are covered. James Parkyn: Yes, if there are funds left over after covering all the student’s expenses, the student may choose to save some of those funds to build an emergency reserve, to contribute to a TFSA, or even to contribute to a FHSA for the purchase of a first home. François Doyon La Rochelle: Totally, James, we have seen it in our practice: a well-funded RESP can do more than pay for education; it can help provide a strong financial start to an adult life. Now, James, we’ve been talking about the ideal situation where the child pursues post-secondary education. But what happens if they decide that university or college simply isn’t for them? James Parkyn: Well, François, that’s a question many parents worry about. The good news, however, is that the money they have saved isn’t automatically lost. There are several options available, and most families have more flexibility than they realize. François Doyon La Rochelle: Then James, let’s start with the easiest piece. What happens to the original contributions? James Parkyn: That’s the simple part, Francois. As we mentioned earlier, the contributions can always be withdrawn by the subscriber tax-free. Since those contributions were made with after-tax dollars, there is no tax owing. François Doyon La Rochelle: Now James, what about the grants and the investment earnings? James Parkyn: Well, Francois, that’s where it gets a little more complicated. If the beneficiary ultimately does not pursue qualifying post-secondary education, the government grants generally must be returned. That’s obviously not the outcome families hope for, but remember that the grants were intended specifically to support education. François Doyon La Rochelle: James, what about the investment earnings that have accumulated over the years? James Parkyn: Well, François, some tax options are available. That’s where planning becomes especially important. If the RESP has been open long enough and certain conditions are met, the investment earnings may be withdrawn as what’s called an Accumulated Income Payment, or AIP. The problem with AIPs, however, is they are taxable to the subscriber and are normally subject to an additional penalty tax. So, it’s usually not the most attractive option. François Doyon La Rochelle: So, James, what’s the alternative then? James Parkyn: Well, François, one of the most valuable alternatives is a transfer to an RRSP. If the subscriber has sufficient RRSP contribution room, up to $50,000 of accumulated income can potentially be transferred into an RRSP. This can significantly reduce or even eliminate the tax consequences that would otherwise apply if they were to withdraw the investment income. François Doyon La Rochelle: James families should also remember that they don’t necessarily need to make those decisions right away. James Parkyn: That’s an important point, François. An RESP can remain open for many years, in fact, up to 35 years, so you can wait to close the account to see if the beneficiary might return to school later in life. A teenager might decide that school is not for him at eighteen but may decide differently at age twenty-two or twenty-five. So, in many situations, patience can be a perfectly reasonable strategy. François Doyon La Rochelle: There may also be situations where another child in the family can benefit from the RESP. James Parkyn: Absolutely, in a family plan, there can be opportunities to redirect some assets toward another beneficiary, subject again to the applicable rules. This is one of the reasons we often encourage families with multiple children to consider a family RESP because it can provide the added flexibility if one child uses less of the funds than expected. François Doyon La Rochelle: So, James, the takeaway here is that if a child doesn’t pursue post-secondary education, it’s not necessarily a disaster. James Parkyn: Exactly, the rules become more complex, and professional advice can be very valuable, but there are usually several paths available. The key message is not to panic and not to make rushed decisions. Understanding the options can save a family a significant amount of tax and help preserve as much value as possible. François Doyon La Rochelle: And I think that’s a fitting reminder of what RESPs are really about. Yes, they’re a powerful tax-efficient savings vehicle, but they’re also a long-term planning tool. The more thoughtfully they’re managed, both during the contribution years and the withdrawal years, the more value families can ultimately extract from them. James Parkyn: Exactly, François, the objective isn’t just to save money; it’s to give the next generation a stronger financial foundation and a better start in life. François Doyon La Rochelle: Totally agree, James. I think we will wrap up here. François Doyon La Rochelle: Thank you, James, for sharing your thoughts and expertise again today. James Parkyn: You are welcome, Francois. François Doyon La Rochelle: That’s it for episode #92 of Capital Topics! Do not forget, if you would like to submit questions or suggestions for the show, please email us at: capitaltopics@pwlcapital.com Also, if you would like our expertise in managing your assets, you can contact us by clicking on the contact us button which is located on the Capital Topics home page and on all our publications. Furthermore, if you like our podcast, please share it when with family and friends and if you have not subscribed to it, please do. Again, thank you for tuning in and please join us for our next episode to be released on October 28th. In the meantime, make sure to consult the Capital Topics website for our latest blog posts. See you soon.
