Saving for Education: How RESPs Work – A Complete Guide by a Montreal CPA Firm Near You

Introduction

A Registered Education Savings Plan (RESP) is one of the most powerful tax-advantaged tools available to Canadian families. With rising tuition costs, student housing expenses, and inflation, planning early for a child’s education is more important than ever. RESPs offer government grants, tax-deferred growth, and flexible withdrawal options. Yet many parents, grandparents, and guardians misunderstand how RESPs work, how much they should contribute, and how to use the funds tax-efficiently. This guide explains everything you need to know to maximize RESPs and avoid common mistakes.

Legal and Regulatory Framework

RESPs are governed by the Income Tax Act and administered through financial institutions. The federal government provides contributions through the Canada Education Savings Grant (CESG) and supports low-income families through the Canada Learning Bond (CLB). Investment income inside an RESP grows tax-deferred, and withdrawals are taxed in the hands of the student—usually in a low tax bracket. CRA monitors RESP withdrawal rules, contribution limits, and lifetime maximums.

Key Court Decisions

In Gao v. Canada, improper RESP withdrawals resulted in tax penalties due to incorrect classification of contributions versus educational assistance payments (EAPs). In Hogarth v. Canada, CRA rejected EAPs that were not properly supported by student enrollment documentation. These cases show the importance of proper documentation and correct categorization when withdrawing from RESPs.

How RESPs Work

An RESP is an investment account designed to help save for a child’s post-secondary education. It has three main components:
1. Contributions – made by parents or other individuals; not tax-deductible.
2. Government Grants – CESG (20% on the first $2,500 per year) and CLB for eligible families.
3. Investment Growth – tax-deferred until withdrawn.
RESPs can be set up as individual plans, family plans, or group plans.

The Canada Education Savings Grant (CESG)

The CESG is the most significant RESP benefit. The government contributes:

• 20% on the first $2,500 contributed each year, up to $500 annually

• Additional CESG of up to 20% more for low-income families

• A lifetime maximum of $7,200 per child
  Unused CESG room can be carried forward, allowing catch-up contributions.

The Canada Learning Bond (CLB)

Low-income families may receive up to $2,000 in CLB payments even without making contributions. Eligibility depends on income-tested benefits and must be applied for through a financial institution.

Tax Treatment of RESP Withdrawals

RESP withdrawals fall into two categories:

1. Contributions (Tax-Free Withdrawals)

Amounts you contributed can be withdrawn tax-free at any time.

2. Educational Assistance Payments (EAPs)

EAPs consist of: government grants + investment growth.
EAPs are taxable to the student, who often has little or no taxable income, resulting in minimal or zero tax. Proof of enrollment is required.

Using RESP Funds for Education

RESP funds can be used for: tuition, textbooks, laptops, school supplies, residence fees, rent, food, transportation, and other education-related expenses. CRA requires proper documentation of full-time or part-time enrollment in a recognized post-secondary program.

Avoiding RESP Penalties

Penalties occur when: withdrawals do not meet eligibility rules, contributions exceed the $50,000 lifetime limit, unused grants must be repaid, or accounts are mismanaged. If the student does not pursue post-secondary education, RESP contributions are returned tax-free, but government grants must be repaid and accumulated income may face penalties unless transferred to an RRSP under specific rules.

RESP Strategies for Maximum Benefit

• Contribute $2,500 annually to maximize CESG.

• Catch up on prior years with $5,000 contributions when possible.

• Start early to maximize investment compounding.

• Use family plans for multiple children.

• Coordinate contributions with grandparents to avoid over-contribution.

• Time EAP withdrawals strategically to minimize tax.

• Consider transferring unused income to an RRSP if conditions allow.

Mackisen Strategy

At Mackisen CPA Montreal, we help families maximize RESP benefits by creating contribution schedules, calculating CESG eligibility, planning EAP timing, minimizing tax on withdrawals, and integrating RESPs with long-term financial and tax strategies. We also guide families when a child does not pursue post-secondary studies to reduce penalties and tax exposure.

Real Client Experience

A Montreal family maximized CESG contributions and saved over $40,000 tax-efficiently for two children. A parent avoided grant repayment by properly structuring EAP withdrawals. A family with a child not attending college recovered RESP income by transferring funds to an RRSP without penalties. A client using grandparents’ contributions avoided over-contribution penalties through our coordination plan.

Common Questions

Are RESP contributions tax-deductible? No. How do I get the maximum CESG? Contribute $2,500 annually. What if my child doesn’t go to school? Contributions are returned tax-free; grants must be repaid. Can I open multiple RESPs? Yes—but contribution limits apply to the child, not the number of plans.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal ensures your RESP strategy is optimized for maximum grants, tax efficiency, and long-term education planning. We help you build a smart, structured approach to fund your child’s future.