RESP – My Suggestion For A Better RESP Program

by Mike Holman

This is the last post of the Big RESP Series. See the previous post on Keeping It All In Perspective.

One of the problems with RESPs is the number of rules surrounding them. This creates a product that is very expensive to administer for the RESP providers and government and very hard to understand for the average parent. Since the rules in their current form (more or less) have been around since 1998 and the government and financial companies have already created their systems and processes for these accounts there is not much point in changing them now. However, I’d like to put forth my ideas on how the RESP program should have been done.

One of the complicating factors of RESPs is the lifetime and annual limit on contribution grants. Because of this, the financial companies and government have to keep track of all the contribution amounts and for family plans, the allocation between beneficiaries.

A better way to do RESPs might have been to just offer tax free accounts ie you make contributions [edit] with no tax rebate [edit] , the investments grow tax free and then upon withdrawal the money is taxed in the hands of the student or if the student doesn’t go to school then it’s taxed in the hands of the subscriber as normal income (no AIP) tax.

What about the grant money you ask? Good point – take the money that would have been paid out in contribution grants and just hand it out to children of a certain age which is similar to Alberta’s ACE program. For example the government might give $100/yr to every child under 10. These grants would have to be put into RESP accounts and would be subject to the normal withdrawal rules outlined above.

Another option with the grant money would be to just give it to students who are actually in or about to start school. That way there are no grants to track and no investments accounts.

One of the benefits of this new RESP would be that it would cost the government the same amount of grant money, both the government and investment companies would benefit from lower administrative costs and lower income people can participate more easily. Currently it’s more middle and higher class people who get the biggest benefit from the RESP program but they are not the ones who need it as much.

That’s it for the RESP series so hopefully you enjoyed reading and learning from it (I know I did) and can use it for reference in the future.

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{ 7 comments… read them below or add one }

1 Traciatim

Could you explain how the current system is geared toward higher income folks and if it was based on income tax it would not be?

If someone making 60K in ontario were to make a contribution of $2000 they would get 623 back from the gov’t making the total cost to them of1377. If someone scrapes by and does the same thing with a 20K salary they would get back 431 costing them 1569, or $192 more.

Currently both would put 2000 away for a cost of 2000 and get a 400 bonus. Isn’t that more fair?

2 FourPillars

Hi Traciatim.

Actually in my suggested plan there is no tax rebate for the contribution – I’ll clarify that in the post.

I didn’t say the current system was geared toward higher income people but rather that they tend to benefit more because they can save money more easily. This is based on a number of newspaper articles I’ve read where they looked at the average income of people who get CESG contributions. Apparently families in lower income ranges do not get many CESG grants.


3 Mike's Wife

In response to giving the money directly to the students when they enter school, I prefer the current method or the every child gets something set up idea. For those lower income families, every dollar added early will be able to earn that much more within the fund and that could offer broader choices.

4 FourPillars

This paper (from 2004) discusses the problems of most of the CESG grants going towards higher income families which was not the stated purpose of the program.

A similar study done by the CD Howe institute in 2002

5 Irina

I think RESP money should be taxed just once when you withdrawing, like RRSP. Not twice. And those enrollement fees are rediculouse.
If your child is not attending 4 year program he will not get all of them back.
My enrollement fees are $3600 and if my child choose to attend 2 year program $2200 will go to the toilet. Money that I was working wery hard to earn, paid on them taxes and at the end she even will not get it.
My mistake was that I trust representetive who was missliding and when I found out it was to lake.

6 Four Pillars

Irina – the pooled plans are a ripoff. RESPs are only taxed once.

7 Don Proteau

I agree completely with your comments on the disfuctional rules and administrative complexity of RESP’s. I am a CFP and an RESP owner and find the amount of time spent on RESP’s far exceeds (dollar for dollar) any other aspect of my pratise. I concur with replacing the RESP plan with a simpler TFSA (minor) plan. I also agree with allocating current RESP grants to current students. Perhaps some industry lobbying is in order!

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