OTTAWA — A private member's bill to make contributions to Registered Education Savings Plans tax deductible has passed third reading in the House of Commons and will now be considered by the Senate.
Here's how RESPs work, and how they compare to Registered Retirement Savings Plans and the just-announced Tax-Free Savings Plan.
RESP: Designed to help parents and relatives save for a child's post-secondary education. There is currently no tax deduction for contributions to these plans, but the money does compound tax-free until withdrawn. Then, it's taxed in the hands of the student who is the beneficiary. Through the Canada Education Savings Grant, the federal government matches 20 per cent of annual contributions to an RESP to a maximum of $500 per child. The lifetime maximum contribution per child is $50,000.
RRSP: To encourage Canadians to save for retirement, the federal government offers a tax deduction on contributions to RRSPs. The money in an RRSP compounds tax-free until withdrawn. At that point, funds are taxed as regular income.
TFSA: Announced in the recent federal budget, the TFSA offers a tax-free way to save up to $5,000 per year. There is no tax deduction for making a contribution, but all withdrawals and investment gains are exempt from taxes. TFSAs are designed to be a savings tool that complements RESPs and RRSPs, rather than replacing them
