Are RESP Contributions Tax-Deductible?

Introduction to RESP and Taxes

If you’re a new parent, grandparent, or guardian, looking to pay for your child’s future post-secondary education, chances are you’ve heard of a Registered Education Savings Plan (RESP). It’s a government-registered savings tool designed to help Canadian families plan for the future.

But when it comes to taxation, things can get a bit confusing. One of the most common questions people have is whether RESP contributions are considered tax-deductible. This isn’t surprising as there are other popular accounts like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSA) that offer Canadians tax advantages.

Understanding the difference between tax benefits and tax-deductible expenses is key.

Are RESP Contributions Tax-Deductible in Canada?

When we talk about registered savings plans, we often think about the tax breaks they offer, but RESP contributions are not considered a tax deduction. Unlike an RRSP, where your contributions lower your taxable income when filing your taxes for the year, money contributed to your registered education savings plan has already been taxed. So, why is there still some confusion?

The Difference Between a Tax Deduction and a Tax Benefit

While an RESP offers tax advantages, there are differences. Specifically, a tax deduction means you reduce your taxable income for the year, which lowers the amount of tax you’re obligated to pay each tax year.

On the other hand, a tax benefit can refer to tax-sheltered growth, tax-free withdrawals, and government incentives, all of which are offered by RESP accounts.

What Tax Benefits Do RESP Accounts Offer?

Although RESP contributions can’t be used to lower your taxable income, they still offer tax perks, making them a valuable tool for families who want to save for their beneficiary’s post-secondary education. Let’s look at the benefits.

Grows Tax-deferred

As you contribute money to your child’s RESP, your investments grow tax-deferred. This means that you won’t pay any tax on your investment income, including interest, dividends, or capital gains, while the RESP money remains in the account. With a lifetime contribution limit of $50,000, this tax-deferred compound can make a significant difference in your investment earnings over time.

Government Grants

Another perk of RESP accounts is government grants:

Canada Education Savings Grant (CESG)

With the Canada education savings grant, the federal government matches 20% of your annual RESP contributions, up to $500 per year, per child, with a lifetime maximum of $7,200. In other words, that’s free money you can put towards your child’s future education.

Canada Learning Bond (CLB)

Lower-income families may also qualify for the CLB, for an additional lifetime limit of up to $2,000 per child.

Provincial Grants

Additional provincial grants are available, depending on which province you and your family reside in:

Quebec Education Savings Incentive (QESI)

The Quebec Education Savings Incentive (QESI) matches 10% of your RESP contributions. This provides an additional boost to your education savings up to a maximum of $250 per year per child and a lifetime maximum of $3,600 per child.

British Columbia Training & Education Savings Grant (BCTESG)

The Training & Education Savings Grant (BCTESG) is a one-time payment of $1,200 into the RESP of eligible children born on or after January 1, 2006, in British Columbia.

Education Assistance Payments Taxed in Student’s Tax Bracket

When your child eventually withdraws money for school expenses like tuition, textbooks or living costs, that money, also known as educational assistance payments (EAPs), is taxed in their lower tax bracket, not yours. This is because most students only work part-time, and they often pay little or no tax on money earned.

RESP Contributions vs RESP Withdrawals

RESP money can be divided into two categories:

1. Your contributions: The money you contribute to the RESP account can always be withdrawn tax-free. Even if your child doesn’t pursue higher education, you won’t be double-taxed.
2. Your investment income and government grants: The government grants and earnings from your contributions (your EAPs) accumulate over time and are taxed when withdrawn. Again, because these payments are taxed in the student’s name, the impact is minimal.

When RESP Isn’t the Best Tax Tool

Although RESPs are a great financial tool for those wanting to save for their child’s future education, they may not be a universal solution, especially if you have numerous financial goals.

For example, if your main goal is to reduce your taxable income, then an RRSP may be a better option. RRSP contributions are tax-deductible, which can result in a significant refund depending on your income level. In contrast, if you want flexible growth and tax-free withdrawals, a TFSA can be better suited, especially if you aren’t saving for anything specific.

Most of the time, however, a combination of an RESP, RRSP, and TFSA is the best strategy of all.

Conclusion: RESP = Smart, Not Deductible

To reiterate, contributions to RESP accounts are not considered a deduction on your income tax in Canada, so you won’t lower your income during tax season. But, RESPs still offer value in other ways, especially in terms of their tax benefits:

• Your savings grow tax-deferred until they’re used.
• You’ll receive government grants that boost your overall savings.
• Withdrawals are taxed at the student’s lower tax rate.

Are you looking to plan for your child’s future? There’s no better time to talk than now. Embark specializes in helping Canadian families maximize the benefits of RESP planning. Reach out to an Embark Education Savings Specialist to learn more about how RESPs can fit into your long-term financial strategy.