An RESP is a tax-sheltered savings plan for a child's post-secondary education, where investments grow tax-free and attract government grants.
An RESP lets contributions grow tax-sheltered until withdrawn for a beneficiary's post-secondary education. Contributions are not deductible, but the plan attracts the Canada Education Savings Grant (20% on the first $2,500 contributed each year, up to a lifetime maximum), effectively free money toward education.
When funds are withdrawn for school, the growth and grants are taxed in the student's hands, usually at a very low or zero rate given their modest income. The lifetime contribution limit per beneficiary is $50,000. Unused grants can carry forward, and rules apply if the child does not pursue post-secondary studies.
A parent contributes $2,500 a year to an RESP and receives the $500 (20%) grant annually. Over years, the contributions, grants and tax-sheltered growth fund the child's education, taxed in the student's low-income hands on withdrawal.
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