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Catching up on RESP Contributions/CESG

There was a question left in the “How RESP’s work” thread asking about carrying forward CESG amounts in the case of years with smaller RESP contributions.  It makes sense, there are years where contributing $2500 to an RESP to maximize the CESG ($500) from the government can be a bit tough to achieve.

There is good news though, even if you don’t contribute enough to maximize the CESG, the contribution room can be carried forward until the CESG stops before the student turns age 18.

Here is the question:

My older child was born in 2006, with no RESP contributions made until this year, 2009. We contributed $5000, enough to use the unused grant room from 2008, however what happens to the unused grant room from 2007 and 2006? If we contribute $5000 in 2010 and $5000 again in 2011, can we get ‘caught up’ on the unused grant room?

To recap a little, the Canada Education Savings Grant (CESG) is a government freebie offered for those who put money into an Registered Education Savings Plan (RESP).  Although the CESG offered varies by income, for simplicity lets assume that it’s 20% of the contribution as that’s the amount that applies to contributions above $500 no matter the income.  As well, the maximum CESG for any child is $7,200.

A couple more facts before we answer the question.  Maximum RESP contributions to receive CESG before 2007, was $2,000 and 2007 onward is $2,500.

Having said that, contribution room can be carried forward from previous years, but there is a maximum CESG in any one year.  That maximum annual CESG is the lesser of $1,000 or 20% of the contribution.  Sounds confusing, but I’ll clarify by answering the reader question above.

The maximum RESP contribution to receive CESG is:

  • 2006: $2,000
  • 2007: $2,500
  • 2008: $2,500
  • Total carry forward: $7,000

In 2009, the reader contributed $5,000 to the RESP.  This means that he maximized his 2009 contribution ($2,500) and used $2,500 from his carry forward amount.  This will result in a CESG of $1,000.  Note that if the point is to maximize CESG, then it doesn’t make a lot of sense to over contribute more than $2,500 as $1,000 is the maximum CESG received in any year.  Also note that by using $2,500 of his carry forward amount, the reader will be left with $4,500 for future years.

In 2010, if he/she contributes another $5,000, he will get another CESG of $1,000 and will be left with $2,000 carry forward space ($4500-$2500).

In 2011, the reader maximum contribution will be $2,500 (current year) + $2,000 (carry forward) which will result in a CESG of $900 (20% of $4,500) for that year.  At this point, the reader will be caught up.

Although RESP accounts have the ability to carry forward contribution room, it’s best not to wait too long as there is a cut off the end of the calender year that the student turns 17.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 10 comments… add one }
  • saveING.ca This is why I signed up with ING Direct January 14, 2010, 10:59 am

    I had no idea this RESP even existed. I will highly consider it for my children.

  • DG January 14, 2010, 12:23 pm

    And if you’re not sure what your CESG limit for this year is, get your child’s SIN and call the CESG folks at 1-888-276-3624.

    Dan.

  • Lakedweller January 14, 2010, 1:25 pm

    Thanks FT!
    I want to take this time to remind all the RESP contributers out there about how the withdrawls are taxed when the money is used. It took me two months to convince RBC that my contributions to the RESP is not considered income to my child. The original CESG is considered income. The gorwth is considered interest earned and also taxable. So when the bank issues the tax form, make sure it is broken up properly. I hope this problem has been corrected nationally.

  • AM January 14, 2010, 1:35 pm

    FT,

    An article on 3. Lakedwellers point would be really helpful. I dont believe Ive seen that discussed anywhere before. Cheers.

  • Kate January 14, 2010, 2:30 pm

    When I contributed into RESP for the first year, I’ve got the regular CESG grant+additional grant. When I then opened discount brokerage account, they told me they cannot transfer money there because of that additional grant. Anybody had any experience dealing with that? Thanks.

  • cashback cards January 14, 2010, 4:17 pm

    This is great information, and is there a certian limit per year for these? Any and specific way of going about getting these type of accounts set up?

    Thanks again for all you do!

  • cannon_fodder January 19, 2010, 1:23 am

    Lakedweller,

    That is good to know. I’d imagine that you are at the leading edge of people withdrawing since they haven’t been around for 18 years. I would imagine that only a portion of parents use the RESPtoday, let alone have been using it for quite some time.

    Kate – I’ve heard that certain brokerages can’t (won’t?) support the additional grant money. Maybe that is your issue.

  • Ed Rempel January 22, 2010, 11:35 pm

    Hi Lakedweller,

    You are right about the income. RBC didn’t show it right? Yes the growth and grant are taxable to the child if you withdraw for education, but the capital is not taxable.

    You also have a choice on each withdrawal to decide how much of the taxable vs. non-taxable amounts to withdraw. With your child’s basic exemptions plus tuition credits, you can tax quite a bit taxable each year without having them pay any tax.

    Ed

    Ed

  • Ed Rempel January 22, 2010, 11:42 pm

    Hi Kate,

    Yes, we have run into that issue. There are actually 4 different credits – basic CESG, additional CESG, Canada Learning Bond and Alberta grant. You have to choose to have your provider apply for all 4.

    Generally, the additional CESG is for families with income below $77,000 and the CLB is for families with income below about $38,000.

    Some providers only carry the basic CESG because of the administrative issues. If you have received one of the other 3 grants and you transfer to a provider that does not carry those, the additional grants have to be sent back to the government.

    So, it is worth asking if your provider will apply for all 4.

    Ed

  • MIB August 26, 2010, 8:22 pm

    I received an extra $50 in additional CESG one year. I now want to move my bank held RESP to a broker. My bank will not transfer it to a financial instituion that does not support the additional CESG.

    Thats right, they will not allow me to forgo the additional CESG ($50) in order to accomplish the transfer.

    Does anyone know of any discount brokers that support the additional CESG?

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