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While Canadians have access to several government-sponsored savings plans, the Education Savings Plan (RESP) is often overlooked. Too many under-utilize this valuable tool, especially as the rising cost of higher education makes college and university unaffordable for more and more young Canadians.

The RESP system has been around for decades, but according to Statistics Canada, growth in its use has stagnated in recent years. In 1999, a year after the introduction of the Canada Education Savings Grant (CESG) – in which the government contributes 20 percent of contributions to each child’s account, up to a maximum of $500 per year – about 16 percent of families with at least one child under 18 had an RESP account. Growth continued steadily, and by 2016, half of all Canadians had an RESP account.

But that number has only increased slightly in recent years, meaning that nearly half of eligible Canadians are missing out on tax-free growth, government subsidies and compound interest, and are ultimately left with money on the table.

Customers can contribute to an RESP for each child up to a lifetime limit of $50,000. The CESG offers up to an additional $7,200 in grants provided contributions are made over a longer period, as annual maximums apply. For lower-income families, the Canada Learning Bond contributes up to $2,000 to an eligible child’s RESP with no personal contribution required.

The RESP is also a strategic investment opportunity to grow money on a tax-free basis – especially in light of changes to the capital gains tax rate, which increased from half to two-thirds on June 25 for all capital gains over $250,000 per year for individuals.

Investments in an RESP are not tax deductible, but taxation of any income or appreciation from contributions, grants, and bonds is deferred until a withdrawal is made from the plan.

If the child attends a post-secondary educational institution, the funds can be withdrawn and taxed in the child’s hands, likely in a lower tax bracket. The child may also be able to reduce the amount of taxes owed by using the tuition tax credit.

With an RESP, advisors can take the guesswork out of the future and help their clients prepare for their children’s college education in a gradual, intelligent and strategic way.

RESPs and the rise in inflation

Inflation has dominated the conversation in recent years—and for good reason. Canadians have felt its effects and must save every penny to combat the rising cost of living. Although inflation has eased recently, prices for everyday expenses are still painfully high—and higher education is no exception.

Today, a four-year degree in Canada costs an average of $75,000, including housing fees. This amount is expected to rise by 39 percent over the next 18 years, leaving many young parents to spend six figures on their child’s education and residency. The cost of textbooks, rent and food has also risen significantly.

Advisors need to remind their clients that RESP funds can be used to cover all of these expenses, as well as other related education costs such as transportation and materials. A long-term savings strategy can help offset the rising costs of higher education.

Advisors should encourage their clients, especially young parents, to open an RESP account as early as possible to maximize tax-free growth. Clients then have the option to invest RESP contributions according to their risk tolerance and time horizon. The earlier an RESP account is opened, the longer savings have time to grow over time.

Inflation is beyond our control, but advisors can help their clients prepare for it. A comprehensive financial plan that includes an education savings strategy with tools like targeted portfolios designed specifically for RESPs can help cushion rising costs and keep higher education affordable for the next generation.

Too many Canadians fail to take advantage of the value of an RESP. But when used and maximized, the accounts can be an effective tool for saving for college.

Damon Murchison is President and CEO of IG Wealth Management, based in Winnipeg.

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