There was a question left in the “How RESP’s work” thread asking about carrying forward CESG amounts in the case of years with smaller RESP contributions. It makes sense, there are years where contributing $2500 to an RESP to maximize the CESG ($500) from the government can be a bit tough to achieve.
There is good news though, even if you don’t contribute enough to maximize the CESG, the contribution room can be carried forward until the CESG stops before the student turns age 18.
Here is the question:
My older child was born in 2006, with no RESP contributions made until this year, 2009. We contributed $5000, enough to use the unused grant room from 2008, however what happens to the unused grant room from 2007 and 2006? If we contribute $5000 in 2010 and $5000 again in 2011, can we get ‘caught up’ on the unused grant room?
To recap a little, the Canada Education Savings Grant (CESG) is a government freebie offered for those who put money into an Registered Education Savings Plan (RESP). Although the CESG offered varies by income, for simplicity lets assume that it’s 20% of the contribution as that’s the amount that applies to contributions above $500 no matter the income. As well, the maximum CESG for any child is $7,200.
A couple more facts before we answer the question. Maximum RESP contributions to receive CESG before 2007, was $2,000 and 2007 onward is $2,500.
Having said that, contribution room can be carried forward from previous years, but there is a maximum CESG in any one year. That maximum annual CESG is the lesser of $1,000 or 20% of the contribution. Sounds confusing, but I’ll clarify by answering the reader question above.
The maximum RESP contribution to receive CESG is:
- 2006: $2,000
- 2007: $2,500
- 2008: $2,500
- Total carry forward: $7,000
In 2009, the reader contributed $5,000 to the RESP. This means that he maximized his 2009 contribution ($2,500) and used $2,500 from his carry forward amount. This will result in a CESG of $1,000. Note that if the point is to maximize CESG, then it doesn’t make a lot of sense to over contribute more than $2,500 as $1,000 is the maximum CESG received in any year. Also note that by using $2,500 of his carry forward amount, the reader will be left with $4,500 for future years.
In 2010, if he/she contributes another $5,000, he will get another CESG of $1,000 and will be left with $2,000 carry forward space ($4500-$2500).
In 2011, the reader maximum contribution will be $2,500 (current year) + $2,000 (carry forward) which will result in a CESG of $900 (20% of $4,500) for that year. At this point, the reader will be caught up.
Although RESP accounts have the ability to carry forward contribution room, it’s best not to wait too long as there is a cut off the end of the calender year that the student turns 17.