The Unexpected Twist: How Your Child's Hard-Earned Cash Can Actually Complicate Their RESP

There’s a special kind of pride that swells in a parent’s chest when their child brings home that first paycheque. It signals growing independence, a budding work ethic, and perhaps a glimpse into their future. We encourage it, celebrate it, and maybe even offer a little guidance on saving. But here’s a rather interesting, often overlooked, twist in the tale: that very income, as wonderful as it is, can inadvertently throw a wrench into the meticulous RESP plans you’ve set up for their post-secondary education.

It’s a head-scratcher, isn’t it? How can a child earning their own money be a problem for their education savings? Well, it boils down to a few nuances within how RESPs, particularly their government grant components, are structured. You see, the system has certain rules, and your child’s financial success, even at a young age, can sometimes bump right up against them. Let’s dive into the specifics.

First off, let’s talk about the Canada Learning Bond (CLB). This is a fantastic initiative, designed to give a financial boost to children from lower-income families. It provides up to $2,000 without requiring any contributions from you, the parent. Here’s the catch: it's entirely income-tested. If your family's net income, which, importantly, includes your child’s earnings once they’re contributing to the household or filing taxes, rises above a certain threshold, you might find your eligibility for future CLB payments disappearing. It's a bummer, really, because it’s meant to help those who need it most, and suddenly, a child's ambition can put that at risk. Even more critically, if the child never goes on to a qualifying post-secondary program, those CLB funds might need to be repaid. Talk about a double-edged sword!

Then there's the Canada Education Savings Grant (CESG). This is probably the most widely known grant, where the government matches a percentage of your contributions, typically 20% on the first $2,500 you put in each year, up to a lifetime maximum. The basic CESG isn't income-tested, which is great. However, there’s also an additional CESG for lower-income families, which is income-tested. Beyond that, the bigger issue many parents face is simply stopping their contributions to the RESP once their child starts earning. You might think, "Hey, they're making money now, they can contribute to their own education, or I can ease up." But by doing so, you could be missing out on valuable matching grants from the government. That’s essentially leaving free money on the table, and who wants to do that?

Now, let's fast forward to the withdrawal stage – when your child is actually enrolled in college or university. The funds you take out for their education, specifically the grants and the investment income (known as Educational Assistance Payments, or EAPs), are taxable in the student's hands. Here's where it gets really interesting: if your student is also working part-time or has a well-paying summer job while studying, their total income for the year could be higher than anticipated. This higher income means those EAPs will be taxed at a higher marginal rate, effectively reducing the net amount of money available for their education. It's a bit of a financial juggling act, isn't it?

And what if, by some chance, your child's RESP becomes overfunded? Perhaps they've been incredibly diligent with their own savings, or maybe they decide to pursue a path that doesn't require as much funding as you initially projected. If there's money left over after all the education expenses, the grant portions might need to be returned to the government. The original principal you contributed is yours to keep, of course, and any investment growth on that principal can be withdrawn, but it will be taxed at your marginal rate plus an additional 20% penalty. It makes you think twice about blindly contributing without considering the bigger picture.

So, what's a proactive parent to do? Communication is absolutely key here. Sit down with your kids, especially as they approach working age, and have an open discussion about the RESP. Explain how it works, what its purpose is, and how their own earnings fit into the grand scheme. Consider adjusting your own RESP contributions based on their income and their post-secondary plans. You might prioritize maximizing the CESG early on, or explore other savings vehicles for them, like a Tax-Free Savings Account (TFSA) or even a Registered Retirement Savings Plan (RRSP), if they’re earning significant income and already maxing out their RESP needs.

Ultimately, a child’s journey into the world of work is a fantastic milestone. It just requires a little extra financial finesse from us parents to ensure it complements, rather than complicates, the carefully laid plans for their future education. A little awareness and proactive planning can go a long way in making sure all those efforts truly pay off.