The article “Can I Have A Multi-Generational RESP?” was originally published on MoneySense on March 26, 2019.

If money is left over in your child’s RESP you can in theory use it for your future grandkid’s education, with some big caveats

Q: I have an existing RESP for my children, but they may not use all the money. Can I add grandchildren (once born) to the same RESP and keep this going in terms of growth and returns?

— Frank

A:  A Registered Education Savings Plan (RESP) is a great way to save for a child or grandchild’s post-secondary education. Eligible studies include college and university, as well as trade schools and similar post-secondary programs.

There are potential federal and provincial government grants and bonds when contributing to a RESP, the most common of which is the Canada Education Savings Grant (CESG). A RESP beneficiary can receive a 20 per cent grant on up to $2,500 per year of contributions ($5,000 if catching up on a previous year of missed grants). These grants get deposited to a RESP account by the government after a contribution is made.

A total of $7,200 in lifetime CESG grants can be earned by a beneficiary, and a total of $50,000 in contributions can be made. It is important to note that if there are multiple RESP accounts for a beneficiary – say, a child’s parents and grandparents – the lifetime totals are based on all accounts cumulatively.

Principle contributions to a RESP can always come out tax-free, while CESG grants and accumulated investment income earned are taxable to the beneficiary upon withdrawal to fund their eligible education. If a beneficiary has completed post-secondary education, or does not attend, there may be repayment and tax implications of remaining CESG grants and accumulated income exceeding the principal contributions still left in the RESP account.

While principal withdrawals are not subject to tax, the CESG grants are repayable, and the accumulated income is subject to the subscriber’s regular tax rate plus a 20 per cent penalty tax. Taxation can be avoided by transferring the income portion to a Registered Retirement Savings Plan (RRSP) to the extent the subscriber has RRSP room and is under the age of 72.

Opening a family RESP is one way to protect against having unused RESP funds, so that the account can be used to multiple beneficiaries. A family RESP account can have children or grandchildren as beneficiaries, so can be opened by a parent or grandparent for more than one beneficiary.

However, if you wish to add a child or grandchild to an existing family RESP, they must be related to you by blood or adoption and be under the age of 21. This may allow you, Frank, to name a future grandchild, but you will be constrained by two issues.

First, a RESP can only stay open for up to 36 years. That probably won’t be long enough for a future unborn grandchild to attend post-secondary school, but it’s certainly possible.

The second constraint is that CESG grants need to be repaid if you add a child other than a brother or sister of the existing beneficiaries. So, adding a grandchild, even if you could keep the account open long enough, would result in repayment of any remaining CESGs for your own children. The accumulated income, however, could still be used for that grandchild, again, subject to the 36-year time limit.

Given the facts here, Frank, you may be better off considering a transfer of any accumulated income into your RRSP, otherwise trying to time the taxable withdrawal in a year where your income is lower.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.