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The Canada Education Savings Grant ( CESG) is a grant provided to complement RESP contributions. The Government of Canada will contribute 20% of the first $2,000 in annual contributions made to an RESP. This means that the Government may contribute up to $400 per year to a participating RESP. This income is available upon withdrawal from the RESP by a post-secondary recipient. The maximum annual contribution to an RESP is $4,000. Any contributions over this amount are subject to taxation.
An RESP is also an excellent source of tax-deferred income. As with any investment, any interest that is accumulated on contributions is taxed when withdrawn. With an RESP, interest is taxed at the recipient's tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax owing to a minimal income level. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student will have a good source of income to fund his or her post-secondary education.
Any principal contributed to the RESP can be withdrawn at any time by its contributor. In this case, any eligible CESG payments on those contributions must be repayed to the government. If the student elects to not attend a post-secondary institution, any accumulated interest may be withdrawn by the contributor; this interest is taxed as income unless it is rolled into a registered retirement savings plan ( RRSP). Up to $50,000 of interest may be rolled into an RRSP, subject to individual contribution limits. Since RRSP contributions are not subject to taxes, the income tax is deferred until retirement.