For decades, the proportion of Canadian households with a registered education savings plan has steadily grown.
But those who study RESP policy say its growing use doesn’t necessarily mean all groups of Canadians are benefitting equally. That’s left experts calling for change in where grant money is used, and questioning whether the RESP is the best tool for administering grant money.
The tax-sheltered savings account is intended to help parents save for their children’s postsecondary education, and it remains the best tool to do so. By 2019, Statistics Canada said 53 per cent of families had one, compared to just 19 per cent two decades earlier.
Capital gains are untaxed, and grants from a program called the Canada Education Savings Grant match 20 per cent of contributions into the account, to a maximum of $500 a year. Households under a certain income threshold can get an extra $50 to $100 in CESG payments.
Despite that extra money for lower-income households, however, data from Statscan show that 55 per cent of CESG payments went to high-income families in 2022, while the rest went to middle- and low-income households. The proportion of money going to higher-income households has also grown since 2019 when it was at 51.5 per cent. The measurement of high-income households changed per year, but in 2022, it was set at $100,392.
At the same time, the RESP offers one-time grants that are given regardless of investment contributions. One example is the Canada Learning Bond, which can provide up to $2,000 to qualifying families. But these grants are sometimes left uncollected because they can only be accessed if a student has an RESP in the first place, and nearly half of Canadian families don’t.
In a September, 2022, report by Statscan, it found an estimated 147,000 18-year-olds who could apply for the bond had not done so yet. That represents $192-million in funds that could be left on the table.
Those who study RESP policy and some in the financial industry say the investment account has unfairly benefitted rich families since its inception in 1974, because wealthier households benefit more from the tax savings and take a larger chunk of grants that are given out based on how much a household invests. Experts also take issue with the fact that the grants that are not tied to investment amounts are still doled out through RESPs, when they could be made available to more people if they were provided through alternative methods such as the national student loan service.
“Distributing education grants through the financial services industry has failed,” said Mike Schilling, chief executive officer and president of Community Savings, a Vancouver-based credit union, who said there’s a reliance on financial institutions to make access to RESPs easy, but there’s little incentive for major banks to do that.
“Banks are motivated to get high-income investors, and so any product which benefits lower-income families, they’re going to get left out. By design this is poorly set up.”
In a recent survey commissioned by Community Savings of B.C. parents, it found that three out of five parents who have an RESP believed that families should receive grant money regardless of whether the family has an RESP or not.
While it sounds fair to give all families grant money instead of those who can afford to access it, it would also cost the government a significantly larger amount of money or diminish the amount of money families could receive if the government’s budget for the program remained the same, according to Kevin Milligan, director of the University of British Columbia’s school of economics, who has studied the effectiveness of the RESP program in the past.
Erika Shaker, director of the Canadian Centre for Policy Alternatives, said a better use for government money would be to directly subsidize the cost of tuition or to target student debt, as the interest payments from those loans disproportionately affects people from low- and modest-income backgrounds.
Ms. Shaker said the RESP “isn’t an affordability plan, it’s a plan that helps the government not worry about affordability.”
While it may seem like a tall order for the federal government to overhaul a system that has been in place since the 1970s, Mr. Schilling said he’s optimistic because there is awareness that the RESP system is shortchanging lower-income people.
“There’s very few people who will look at this and think we’re doing this right,” said Mr. Schilling
In the meantime, Prof. Milligan urged institutions to make it as seamless as possible for clients to set up an RESP in the first place. Currently he said most parents have to set an appointment, come to the bank in person and have a meeting that is somewhat unnecessary. Some of these institutions will sometimes have minimum account balances as well, making it more difficult for low-income families to start investing.
He suggested people look to online investing platforms such as Wealthsimple, which allow people to set up an account online with low or no minimum balances.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
Salmaan Farooqui