Case Study: Thoughtful Planning for RESP Contributions

Jack and Jill are excited to welcome their granddaughter, Kate, to the family and would like to set aside funds to help her with future post-secondary education costs.

They plan to contribute the lifetime maximum of $50,000 to a Registered Education Savings Plan (RESP) for Kate and currently have this cash available. An RESP is a powerful tool for helping fund education and offers two primary advantages: government grants and tax-efficient growth.

RESP Benefits

Government Grants

RESPs are eligible for both provincial and federal government grants.

For British Columbia residents, beneficiaries may receive a one-time provincial grant of $1,200 when they turn six. This is known as the British Columbia Training and Education Savings Grant (BCTESG) and does not require any contributions to be made.

At the federal level, the Canada Education Savings Grant (CESG) provides a 20% matching grant on RESP contributions, up to an annual maximum of $500 per beneficiary. Over time, this can result in a maximum lifetime CESG benefit of $7,200.

Tax Efficiency

Investment growth inside an RESP is tax-deferred. When funds are withdrawn, the taxable portion (investment growth and government grants) is taxed in the hands of the beneficiary, provided the beneficiary meets the eligibility requirements.

Because students typically have little or no taxable income, this often results in minimal, if any, tax being paid on withdrawals.

Planning Decision

Jack and Jill understand that they cannot fully maximize both government grants and tax efficiency at the same time.

The CESG is designed to encourage consistent, long-term contributions. Contributing the full $50,000 immediately would maximize tax-deferred growth, but only a small portion of the available CESG would be received.

Alternatively, spreading contributions over time would allow them to fully maximize the CESG, but this would require temporarily holding a portion of the funds in a taxable non-registered investment account.

To determine the most effective strategy, Jack and Jill asked their financial advisor to compare several options.

Planning Assumptions:

• RESP annual return: 6%*
• Non-registered annual return: 4.8%**
• Projection period: 18 years
• The $1,200 BC Training and Education Savings Grant is received when Kate turns six

* Before-tax return assumption, reflecting the expectation that little or no tax is paid by the beneficiary
** After-tax return assumption for Jack and Jill

Scenario I: Maximize Tax Efficiency

RESP Contributions
Start of Year 1: $50,000

Total CESG Received
$500 (first year only)

Projected Value at Age 18
$146,559 (entirely within the RESP)

Scenario II: Maximize Government Grants

RESP Contributions
Start of Year 1: $16,500
Start of Years 2–14: $2,500 annually
Start of Year 15: $1,000

Total CESG Received
$7,200 (maximum lifetime amount)

Non-Registered Account
Start of Year 1: $33,500 contributed
Start of Years 2–14: $2,500 withdrawn annually
Start of Year 15: $1,000 withdrawn

Projected Value at Age 18
$149,681 (combined RESP and non-registered accounts)

Initial Takeaways

Based on these assumptions, maximizing government grants produces a better outcome than contributing the full $50,000 immediately. However, there may be an opportunity to further improve results.

In the scenarios above, the funds not immediately contributed to the RESP are assumed to earn a lower after-tax return of 4.8%. The question then becomes: how long does it make sense to accept a lower return in exchange for a future 20% government matching grant?

Scenario III: A Hybrid Approach

Rather than making an all-or-nothing decision, each $2,500 contribution can be evaluated individually.

Based on the projections:
• Waiting up to eight years to contribute and receive CESG matching produces a higher long-term value than investing immediately without the grant.
• Waiting nine years or longer results in a lower ending value. Under this hybrid approach, Jack and Jill would:
• Contribute $30,000 to the RESP initially
• Contribute the remaining $20,000 over the next eight years ($2,500 per year)

Projected Value at Age 18
$151,275 (combined RESP and non-registered accounts)

Important Considerations

These projections are not an exact science. They are based on assumptions about future investment returns and tax rates, both of which will differ for each family and will vary over time. Actual outcomes will inevitably be different from the projections shown.

There are also important estate planning considerations. Jack and Jill, as the RESP subscribers, have the ability to name successor subscribers in their wills. If both were to pass away, the RESP could continue under the successor subscriber without disruption. In contrast, any funds held in a non-registered account at that time would form part of their estate and be subject to probate.

Final Thoughts

Based on these projections, contributing the full $50,000 immediately is unlikely to be the most effective strategy. At the same time, focusing solely on maximizing government grants may not make sense when funds are already available for investment.

The optimal approach typically involves balancing the RESP’s tax efficiency with the value of government grants, while also considering cash-flow flexibility and estate planning implications. ■