Are RESP Contributions Tax Deductible?

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So you’re thinking of starting an RESP for your kids or already started, but wondering if RESP is tax deductible? Will contributions to your RESP reduce your tax liability during tax-filing season?

This post will start by answering the question, then go into details about how RESP contributions work, the tax-advantages, and the contribution limits.

Let’s start…

Are RESP contributions tax-deductible?

Unfortunately, RESP contributions are not tax-deductible. Unlike contributions to your registered retirement savings plan (RRSP) that reduce your taxable income and indirectly the taxes you get to pay, RESP contributions are not tax deductible.

Contributions to RESP are treated the same way as TFSA contributions – they won’t reduce your taxable income, but they grow tax-free as long as they remain in the account.

So how does RESP contributions work and what are some of the benefits and tax-advantages of using an RESP?

Related: Tax Deductions vs Tax Credit

Are RESP contributions tax-deductible? And some other tax advantages

How RESP Contributions Work

RESP is a tax-sheltered account that is designed to encourage parents or any one to save for a post-secondary education.

The maximum RESP contribution is $50,000. This is a lifetime limit per beneficiary – there are no annual limits like you have for TFSAs or RRSPs. Meaning a subscriber, e.g. Parent, may decide to contribute the whole amount in a single year if they wish.

This would generally be a bad idea because of how the government grants, Canada Educational Savings Grant (CESG), work.

Through the Basic CESG, contributions to an RESP will be matched by 20% on the first $2,500 per annum. Low-income families can also receive additional CESG that pays 10% or 20% of the first $500.

The lifetime limit for CESG is $7,200. And CESG room accumulates so you can always contribute in future years to catchup with any missed years. However, you can only catchup one year at a time.

So if you contribute $50,000 in a single year, you can only receive a maximum CESG of $1,000 and miss out on all future grants.

Contributions may also be eligible for Canada Learning Bond up to a lifetime maximum of $2,000. Check this post to learn more about CLB and how it works.

Tax Advantages Of RESP Contributions

While RESP is not tax deductible, there are still some tax advantages if you use it to save for your kids’ education:

  1. The RESP contributions will continue to grow and compound tax-free until you’re ready to start making withdrawals from the account.
  2. When you start making withdrawals, the Educational Assistance Payments (EAP) will be taxed in the hands of the students.

Since they’ll have little or no income, the EAP can be withdrawn tax-free or with very little taxes paid.

EAP is made up of all the payments from an RESP excluding the original contribution. It includes all the grant money and any income or returns earned and compounded in the account.

Best RESP Canada

Whether you’re just starting out or looking for a financial institution to move your RESP to, these are some of the best RESP providers in Canada:

1. Questrade RESP

You can pick between a self-directed or managed (robo-advisor) RESP account. With the robo-advisor, the management fees start at just 0.25% for assets below $100,000.

But if you’re interested in handling all the investing decisions yourself, then you can opt for a self-directed account. Luckily, you can easily build a low-cost diversified portfolio quickly using asset allocation ETFs.

Check here to see a model RESP portfolio built using all-in-one ETFs that you can buy commission free with Questrade.

Get $50 Trade Rebate or $10,000 managed free for the first year using the Questrade Offer CodeWALLETBLISS” or by clicking the button below.

Related Post: Questrade RESP Review

2. Justwealth RESP

Justwealth only offers a managed account. That is, you simply contribute to the account and they’ll handle all the investing an on-going management.

They offer target date education funds, an innovative product that automatically reduce the risk of your portfolio as the maturity date gets closer.

Pricing starts at 0.50%, with a minimum of $2.50 per month.

3.Wealthsimple RESP

Finally, Wealthsimple provides RESP account through its robo-advisor product, Wealthsimple Invest.

There are no minimum account balances so you can start with as little as $1. You also get a personalized, passively managed portfolio with auto-rebalancing.

Management fees is also 0.50% for deposits below $100,000.

Related: Best RESP Provider

FAQs: Is RESP Tax Deductible?

Do RESP contributions reduce taxable income?

Unfortunately, RESP contributions do not reduce your taxable income. They are similar to TFSA contributions. However, the money will continue to grow tax-free as long as they remain in the account.

Can you claim RESP contributions on your taxes?

No, you can not since they are not tax- deductible. Unlike RRSPs, contributions to your RESP is deemed to be after-tax.

Does RESP withdrawal count as income?

It depends on the make up of the RESP withdrawal. The portion relating to your initial contributions, called Return of Contributions (ROC), will not count as income. However, the educational assistance payments, made up of grants and income earned on your contributions, will count as income in the hands of the RESP beneficiary (your kids).

Final Thoughts

In conclusion, RESPs may not be tax-deductible, but they are still a great way for Canadians to save towards their kids’ education.

And you get a guaranteed return of 20% for a total of $7,200 per child through the government grant.

So if you can, you should definitely try to contribute enough each year to take advantage of the $500 government grant per child.

Related Post: How Much Should I Contribute To My RESP Per Month?

Simon is a CPA by day and a Personal Finance Blogger by night. With over a decade experience in financial services, he's passionate about personal finance, investing and helping people take control of their financial life.

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