The Risks and Restrictions of RESPs

With a Registered Education Savings Plan (RESP) comes both risk and restrictions.

The greatest risk is that your child will not take part in qualifying post-secondary education. This will result in paying back the federal grant portion of the RESP, and could result in forfeiture of the earnings in the RESP. At best, the earnings can be transferred to an RRSP (maximum amount $50,000) if:

	there is RRSP contribution room available,
	the RESP has existed for at least 10 years, and
	the beneficiary is at least 21 years old and not pursuing post-secondary education.

If no RRSP contribution room is available, the earnings can be returned to the subscriber, again only if the RESP has existed for at least 10 years, and the beneficiary is at least 21 years old. This will attract tax at the subscriber's marginal tax rate, plus an additional tax of 20%. If the RESP is held in a pooled group scholarship plan, the earnings may be completely lost, with the subscriber getting back less money than was originally contributed, due to fees paid to the promoter.

RESPs are restricted to being used for qualifying post-secondary education. With some plans, there is a set payment schedule which must be followed. If the payment schedule is not followed, interest may be charged, or the plan may be terminated.

Another risk of RESPs was highlighted in a May 2020 Ontario Superior Court of Justice case, Santella v Bruneau 2020 ONSC 2937 (CanLII). In this case, an intestate deceased father left a share of a Quebec condo to his minor son. Quebec law required that a guardian be appointed with respect to the property of the minor son, so a Children's Lawyer was appointed. Ms. Santella, widow and mother, wanted to place some of the funds from her son's portion of the sale of the condo into RESPs. This was opposed by the Children's Lawyer because of "the historical treatment of RESP's in the context of both family law and bankruptcy proceedings. The Children's Lawyer submits that any portion of the Inheritance placed in an RESP is at risk because of cases in which an RESP has been found to be an asset of the adult subscriber and not that of the child for whose benefit the RESP is intended." The Court agreed with the Children's Lawyer and ordered that the son's share of the proceeds from the condo be deposited with the Accountant for the Superior Court of Justice.

The above case also highlights the problems of dying intestate (without a will).

CESG and CLB Not Payable to Non-Resident Beneficiary

Canada Education Savings Grant Regulations s. 10(3)

Note that if the beneficiary of the RESP is a non-resident at the time of Educational Assistance Payments, then the CESG and Canada Learning Bond (CLB) portions of the RESP cannot be paid. A beneficiary can be a student at a foreign educational institution and still be considered a Canadian resident in some cases. See our information on Canadian residents.

Tax Tip: If you plan to start an RESP, make sure you read and understand all the details first!

Revised: September 20, 2024