When it comes to putting money into an RESP, it is very important to know the RESP contribution rules. The rules are complicated and somewhat confusing but I will do my best to try and help you understand how they work.
It's all about the Canadian Education Savings Grant (CESG).
The CESG is 20% of every eligible contribution to the RESP to a maximum grant of $500. That essentially means you can put in up to $2500 to maximize the government grant at $500. Prior to 2007, the grant maximum was lower at $400 per year per child which meant you could only put in $2000 per year into the RESP.
The CESG limit can be carried forward if not used. In fact, each child, resident in Canada, began to accumulate grant contribution room since January 1st, 1998. For example, if Cassie was born in 1998 but did not have an RESP until 2002, she will have accumulated a total of $10,000 ($2,000/yr x 5) in grant contribution room by the end of that year.
Catching up on the CESG one year at a time
That being said, the rules only allow Cassie to catch up on the carry forward of the CESG one year at a time. For example, Cassie's parents could put in $4000 for 2002, which will qualify for the CESG for 2002 and also the previous year 2001. The government would have contributed $800 on the $4000 contribution. In 2003, her parents could contribute another $4000, which will qualify for the 2003 CESG and the 2000 grant. By 2005, the parents would have caught up on the unused CESG credits. They would have put in $16,000 from 2002 to 2005 and the government will have put in $3,200 of CESG.
In 2007, the CESG limits were increased to a maximum of $500 which means that contributions to the RESP could increase from $2000 to $2500 to maximize the grant money.
The lifetime CESG Limit
Not only are there different rules for the annual limits and the catching up rules, there is also a lifetime limit of $7200 of CESG per child/beneficiary. Essentially if you maximize the grant every year ($500 per year), you will reach the lifetime limit in the 15th year. You can still contribute to the RESP after that but you will not get any more grants beyond the $7200 lifetime limit.
RESP contribution limits are not the same.
Although the maximum contribution limit from all subscribers to each beneficiary eligible for the Canada Education Savings Grant is $2,500 per calendar year, you can actually contribute more than that to the RESP every year.
Also, If you are catching up on contribution from previous years, you can actually contribute more than $5000 per year to the RESP but any amount greater than $5000 will not be eligible for the CESG. In most cases, it doesn’t really make sense to put more than $5000 or $2500 into the RESP unless you have already maximized the $7200 lifetime CESG.
The lifetime RESP limit
Remember that the lifetime CESG limit is $7200. The RESP also has a lifetime maximum limit of $50,000. Of this $50,000 lifetime contribution limit, only $36,000 would qualify for the 20% CESG grant before maximizing the $7200 limit.
Is there any advantage contributing more than $36,000 into the RESP if you will not get the 20%? Remember that the contributions can always be withdrawn tax free and if the child goes to a qualifying school / program, the growth is taxed in the hands of the child.
You can have more than 1 RESP
You can have as many RESPs as you want but regardless of the number of plans, the limits apply to each beneficiary. So, for example, if a parent and a grandparent each wanted to set up an RESP for their child or grandchild, the total amount that can be contributed by both subscribers each year is still $5,000. There must be some communication within a family to make sure that the $5,000 limit per year and the $50,000 lifetime limit are not exceeded.
Penalty tax on over contributions
An over contribution is any amount that exceeds the maximum lifetime limit of $50,000.00.
If contributions are made in excess of the $50,000 lifetime limit, any excess contributions will be subject to a penalty tax of one per cent per month of the amount of the over contribution at the end of that month.
Contribution maximums are set per beneficiary, not per plan.
As you can see there are many different RESP contribution rules to be aware of. Talk to a qualified advisor of you need help sorting through these RESP contribution rules
For more information on RESP rules, check out my online Guide to RESPs