Canadian RESP -- please explain the tax deferral?

Question

As I understand ReSPs, the high income parents contribute some money and *don't* receive a tax credit for it. Then, 18 years later, the low-income kid "receives" the money (principal and interest) as income and pays minimal or no tax on it, because they're poor and pay tuition. But how is this different from just buying a security, waiting 18 years, and then giving its future value as a gift to your kid? No one pays tax on the first $10k of income; so a $5000 annual gift to your otherwise-poor kid would be tax-free, which is no worse off than a $5000 RESP payment to the kid.

So the kid doesn't get any benefit. And, as the parent, you didn't get a write-off 18 years earlier, so you don't get any benefit. The education grants are good, but am I missing something? Where is the tax deferrment?

Answer 1

The deferral is the sheltering of income taxation for your RESP contributions, while you need to pay tax on income earned annually from buying a security investment.  As you can appreciate, the funds within an RESP will grow much faster than a security investment for the tax shetlering annually.  In additon, the govt provides a grant to low family income parents having an RESP for their child.

As you have noted, the promoter (company that you bought your RESP) can return your contributions to you tax-free when the contract ends or at any time before. Promoters do not issue T4A, Statement of pension, Retirement, Annuity and Other Income slips to report these payments. You do not include these payments as income on your tax return.  On the other hand, there will be a T4A issued for income earned within the RESP, but generally taxable at a lower tax rate by your kids when they used the funds for post secondary education purposes.

For more information, see IC93-3, Registered Education Savings Plans.  http://www.cra-arc.gc.ca/E/pub/tp/ic93-3...