Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.
Want free money from the government? We bet that’s a resounding “yes”, especially if we’re suggesting you get it through legitimate means.
Luckily that’s exactly what the Canada Education Savings Grant (CESG) is in a nutshell: free money from the federal government as a kind of reward for saving for your child’s post-secondary education.
In 2017 alone the government distributed $929 million in CESG’s,commonly referred to as the RESP grant, although only 52% of the 7 million children in this country received one. That means almost half of Canadian children are missing out even though it’s available for all income brackets and requires minimal, if any, paperwork.
All you have to do to get the grant is to open and contribute funds to a RESP.
If you do that, Ottawa will match 20% of your RESP contributions to a lifetime limit of $7,200 until the child is 17.
Just how expensive is education?
Undergraduate tuition and compulsory fees alone averaged $7,750 for the 2018-2019 school year, and the cost is far steeper for those in professional courses like dentistry ($23,474), medicine ($14,780) law ($13,332) or an MBA ($30,570).
Student’s often have little choice but to borrow, and the average debt at time of graduation is $26,300, according to the last available Statscan data.
But the high cost shouldn’t turn you off higher education. Yes, it’s expensive. But it also pays: 71% of jobs require some form of post-secondary education. Men with a bachelor’s degree earn a median salary of $82,000, 47% more than a man with a high school diploma, 20% more than men with a college diploma and 12.5% more than an apprenticeship certificate, reports Statistics Canada.
Meanwhile women with a bachelor's degree earn $68,342, whichis 58% higher than the earnings of women with a high school diploma.
How does CESG work
Getting the grant is simple: Open an RESP, deposit funds and request the CESG. Let’s go through that in detail.
1.Open an RESP
First, an adult must open an RESP for a child. It’s usually the parents, but grandparents, aunts, uncles and friends can also open one.
And as of March 2018, parents in Ontario are able to open an RESP at the same time as they apply for the province’s online birth registration service.
2. Deposit funds
You must contribute $2,500 annually to get the full grant. You’re free to contribute, however, as much as you wish every year, to a lifetime maximum of $50,000.
Although the government won’t be topping up additional savings, you’ll still get to enjoy your money growing tax-free inside this sheltered account—a major benefit of its own.
If you can’t swing a large contribution this year don’t be discouraged. You should still open an account and save what you can, because unused grant contribution room carries forward until the child is 17.
3. Apply for CESG
Now, all you have to do is fill out and submit the CESG document from the financial institution at which you opened your RESP. Some institutions automatically apply for the grant on your behalf and others will provide you with a simple one-page form.
After you request the CESG, the government will automatically deposit 20% of your contributions into the account, up to to $500 a year. It could take three months to see the grant in your account.
Additional grant money for low-income earners
Low-income families are eligible for an additional grant on the first $500 they deposit every year as part of an initiative to reduce barriers to higher learning. No additional paperwork is required.
If your family income is $45,916 or less, the government will match your first $500 deposit by 40%, or $200. That means if you contribute $2,500, you will receive a total of $600 instead of $500 annually.
If your family income is between $45,917 and $91,831, the government will match your first $500 deposit by 30%, or $150. So, a $2,500 annual contribution is matched at $550.
Any additional deposits are matched by the regular 20% and the lifetime maximum grant is still $7200.
Saving $500 a year is about $41.66 per month, which can be a challenge for low-income families, but is achievable by getting a earning extra income on the side or by cutting back on a bill.
It may be encouraging to hear that 60% of Canadian children who get a grant are from low-to-middle income families, and the proportion of CESG money going toward these families is increasing every year—from 2007 to 2017 grants to these families rose by 209% to $324 million.
Is it too late get the grant if my kid is already in high school?
Since the government’s specific intent with this grant is to encourage long-term savings, it requires you to start stashing cash in an RESP before the end of the calendar year in which the child turns 15.
Teenagers who are 16 or 17 can still get the grant but only if at least $2,000 was deposited before the end of the calendar year they turned 15 or if at least $100 was deposited every year for at least four years before they turned 15.
In other words, it’s never too early to open an RESP.
What if my kid doesn’t end up going to school? Do they get to keep the grant money?
School isn’t for everyone and you can certainly be successful without it.
But note that the RESP isn’t just for a university degree or a college diploma, many trade schools, and even part-time college studies, are eligible. A beneficiary can also decide to go to school later. An RESP can stay open for 36 years.
Otherwise, the funds can be transferred to a sibling under 21 years-old.
But if none of your children decide to go to any kind of post-secondary school within the time frame then the grant money must be returned.
The benefits of CESG
1.The tax-deferred status of the RESP
You pay no taxes on any growth within an RESP, only upon withdrawal. And since you withdraw it in the name of the beneficiary—almost always a student who is in the lowest possible marginal tax bracket—taxes are minimal.
2.The magic of automated investing
Let’s say you save $2,500 a year in an RESP for 17 years, for a total of $42,500. Since you know you need the money in under two decades you invest using a robo-advisor in a low- to medium-risk portfolioacross the entire stock market using Exchange Traded Funds (ETFs). Although you can never predict returns, let’s estimate a rate of return of 3.5%, which is just under the 4-5% long-term returns we expect for a portfolio of risky assets.
By the time your child is ready to start school, you’d have about $61,415, an incredible start for any student. But now, let’s add in the grant money, of $500 per year for the first 14 years, when it would reach the lifetime limit of $7,200. Now you’re looking at growth closer to $72,655, a difference of $11,240. And remember, that’s $11,240 you didn’t have to clock in at the office for.
Is all this talk of free money making you eager to start saving for your child’s education? Open an RESP with Wealthsimple Invest today, the only automated investing services to offer all of its clients unlimited human support. Every Wealthsimple Invest client gets state-of-the-art technology, low fees, and the kind of personalized, friendly service you might have not thought imaginable from a low-priced investment service.