While many Canadians are aware that the government provides annual grants on contribution to RESPs, many people are simply unaware of the small but important nuances in maximizing those grants. The Canada Education Savings Grant (“CESG”) is currently limited to 20% of the annual RESP contributions, up to a maximum annual amount of $500 per child. To receive the maximum amount, one should contribute $2,500 annually. If the amount is not maxed out, there may be a limit on your ability to carry forward these grants. While the carry forward deadline is technically once the child reaches 17, it can be very difficult to catch up on utilizing any unused grants. This is because one may only go back one year at a time to make up for missed contributions; the accumulated carry forward cannot be utilized simultaneously. If you begin making up the contributions too late, you may miss out on unused carryforwards.
For example, if you have been contributing $1,000 annually, then you have been receiving $200 in grant money, effectively losing out on the additional $300 of possible grants for each year. You may only catch up on receiving grants one year at a time, meaning that in the current tax year you may contribute an additional $1,500 for last year (making it a $2,500 total annual contribution) and an additional $1,500 for this year, as to maximize the annual grants to $500 per child per year.
Keep in mind that while there is no annual contribution limit, there is a lifetime contribution limit set at $50,000 per child. There is also a lifetime grant limit of $7,200. So, of the maximum lifetime contribution limit of $50,000, only $36,000 would qualify for the 20% CESG grant to reach the lifetime $7,200 grant limit.
If you begin catching up when your child is young, it may still be possible to play catch up. If however, you wait until your child is much older, it may be impossible to maximize the annual grant amount of $500 per child and lifetime grant amount of $7,200 per child. Not to mention, the sooner your child has funds accumulating in the RESP, the greater the opportunity for the investment to grow on a tax-deferred basis.
December 31 st is fast approaching. Take a few minutes to check in on your RESP contribution amounts and ask whether you have been maximizing the CESG grant. If you have not, find out what carry forward is available, and make a plan to catch up on maximizing the tax-deferred investment growth and what is essentially free government money!
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