Grandparents: 5 reasons to open an RESP for your grandchildren (and how to do it)

Looking for a concrete way to help your grandchildren, one that lasts longer than a Christmas gift? The RESP is one of the few investments where governments add money to what you put in. Here is how it works and why so many grandparents have adopted it.

Every year, the federal government pays 20% of your contributions, up to $500 per child, to a lifetime maximum of $7,200. In Quebec, the QESI adds 10% of contributions, up to $250 a year and $3,600 over a lifetime.

Take Pierre, 66, who contributes $2,500 a year for his grandson Samuel, who lives in Quebec. Each year, $750 in grants is added to his contributions, or 30% before any investment return. By contributing for about 14 years, or $36,000, Pierre can secure up to $10,800 in grants for Samuel.

Investment income and grants accumulate tax-free as long as they stay in the plan. When withdrawals are made for school, tax applies only to the amounts the student withdraws, at the student’s own rate, which is generally lower than that of a retired grandparent.

It is a way to transfer value to a family member who will pay very little tax, while keeping control of the plan.

You did not open an RESP when your granddaughter was born? It is not too late. Grant room accumulates from the child’s birth, even without an RESP, and you can catch up on missed years.

Catching up happens one year at a time: by contributing $5,000 in a year, you can receive up to $1,000 in CESG. For the QESI, the maximum annual amount goes from $250 to $500 when there is accumulated room. A grandparent who contributes $5,000 for a 5-year-old can therefore receive up to $1,500 in grants in the same year.

• Opening: you open the plan and name your grandchild as beneficiary. You must provide the social insurance numbers of the subscriber and the beneficiary. A family plan can also cover several grandchildren.
• Contributions: they are not tax-deductible, but there is no annual limit. The lifetime ceiling is $50,000 per beneficiary, regardless of the number of subscribers.
• Pace: $2,500 a year captures the basic annual grant, in one payment or through automatic withdrawals.
• Withdrawals: when your grandchild is studying, educational assistance payments are paid to them.

As the subscriber, you decide on the investments and the timing of withdrawals. If your grandchild does not pursue studies, your contributions can be returned to you tax-free, and the grants are repaid to the governments.

Also think ahead: upon your death, a sole-subscriber RESP forms part of your estate. You can name a replacement subscriber in your will, often the child’s parent. For a grandparent couple, a plan with two subscribers is simpler: when the first one dies, the survivor generally becomes the owner, according to the terms of the plan.

In summary

Grants of up to $10,800 per child, tax-sheltered growth, the option to catch up, control over your funds: the RESP is one of the best tools for grandparents who want to help in a concrete way. The child’s place of residence determines access to the QESI, which is worth confirming before you contribute.

At Gestalt Financial Group, we support families in setting up multigenerational RESPs. Contact us for a no-obligation meeting.

This information is general in nature and does not constitute personalized advice.