XEQT for Kids: RESP, Grants, and the Right Approach

What is an RESP?

A Registered Education Savings Plan is a tax-sheltered account designed for saving toward a child's post-secondary education. Contributions are made with after-tax dollars. Growth inside the plan is tax-deferred. When funds are withdrawn for education, they are taxed in the student's hands, typically at a very low rate.

The RESP can hold virtually any investment available in a standard brokerage account: cash, GICs, mutual funds, and ETFs including XEQT. The plan remains open for up to 35 years from the date it was opened, giving families substantial time to contribute and grow the investments.

RESPs can be individual (for one beneficiary), family (for multiple children who share the plan), or group (a pooled plan offered by scholarship trust companies, which generally have more restrictions and higher fees than self-directed plans at a brokerage). For most families, a family or individual RESP at a discount brokerage is the best structure.

The CESG: free money from the government

The Canada Education Savings Grant is the defining advantage of the RESP. The federal government contributes 20% of your annual RESP contributions, up to the first $2,500 per year. That means $500 in free government money for every year you contribute at least $2,500. Over 18 years, the maximum lifetime CESG is $7,200.

To receive the full $500 CESG per year, you need to contribute at least $2,500 annually, or approximately $208 per month. Contributions above $2,500 per year do not attract additional CESG in that year, though unused CESG room from prior years (up to $1,000 in catch-up per year) can be claimed if contributions exceed $2,500.

Families with lower household income may also qualify for the Canada Learning Bond (CLB), an additional grant of up to $2,000 over time that requires no matching contribution. Check the Government of Canada website or your brokerage for CLB eligibility.

The CESG represents an immediate 20% return on your first $2,500. No investment reliably provides a guaranteed 20% return. Contributing to the RESP to maximize CESG should be a priority for any family that can manage it, even before maxing a TFSA, because the grant is money that cannot be recovered if the annual window is missed.

Can you hold XEQT in an RESP?

Yes. XEQT is a qualified investment for RESPs. It can be held inside an RESP at any Canadian brokerage that offers self-directed accounts, including Wealthsimple, Questrade, TD Direct Investing, and others.

Holding XEQT inside an RESP means the compounding of a globally diversified equity portfolio benefits from the tax deferral of the registered account. Dividends and capital gains inside the RESP are not taxed annually. They accumulate until withdrawal, at which point they are included in the student's income, typically at a low or zero rate for a student with limited income.

When the child is young and post-secondary is 15 or more years away, XEQT's 100% equity allocation is appropriate. The time horizon is long enough to recover from equity drawdowns. As the child approaches university age, a glide path toward more conservative allocations is prudent, covered in the section below.

Where to open an RESP

A self-directed RESP at a discount brokerage gives you access to XEQT and other ETFs at low cost. Wealthsimple offers RESP accounts that are available commission-free for ETF purchases. Questrade also offers RESPs with commission-free ETF purchases. Both are good choices for families who want to hold XEQT inside the RESP.

Avoid group RESP scholarship trust plans, which often come with high fees, complex redemption conditions, and limited investment options. These products are aggressively marketed but consistently ranked poorly compared to self-directed RESPs at discount brokerages by independent financial educators. The CESG is the same regardless of where the RESP is held. The investment fees and flexibility vary enormously.

Contribution strategy

Contribute at least $2,500 per year to maximize the annual CESG of $500. Do this from as early as possible, ideally from the year the child is born. The CESG can be claimed from birth until the year the child turns 17, subject to eligibility conditions.

If you cannot afford $2,500 per year immediately, contribute what you can. Even smaller contributions attract partial CESG (20% of whatever you contribute up to $2,500). Starting early and contributing consistently is more valuable than waiting until you can make a larger lump sum.

The RESP has a lifetime contribution limit of $50,000 per beneficiary. There is no annual contribution limit beyond the CESG optimization threshold. Some families make a single large contribution early and invest it in XEQT to maximize the compounding period, while others prefer the monthly contribution approach. Both strategies work.

Age-based glide path

XEQT is appropriate when the education timeline is long. As the child approaches university age, shifting to more conservative investments reduces the risk of a market decline just before the funds are needed.

The glide path matters because RESP withdrawals are often needed over four consecutive years of university or college. A 30% market decline in the year before first-year tuition is a real financial problem if the funds are still 100% in XEQT. Beginning the shift to more conservative allocations around age 12 to 14 preserves the growth years while reducing timing risk near the end.

How withdrawals work

RESP withdrawals fall into two categories: contributions (which come back to you tax-free, since they were made with after-tax dollars) and Educational Assistance Payments (EAPs), which include the CESG grants and accumulated investment income. EAPs are taxed in the student's hands.

Most students have low income during their studies, meaning the EAPs may be taxed at a very low marginal rate or not at all after applying the basic personal amount and tuition credits. This is the tax advantage of the RESP: money that grew inside the plan is effectively transferred from a higher-income parent to a lower-income student at withdrawal, often at near-zero tax.

If the child does not attend post-secondary

If the beneficiary does not attend a qualifying post-secondary program, there are several options. The RESP can remain open for up to 35 years from opening, giving the child time to reconsider. The contributions can be withdrawn by the subscriber (you) tax-free. The CESG grants are returned to the government. The accumulated investment income inside the plan can be transferred to your RRSP (up to your available room, subject to rules), or can be withdrawn as income subject to regular income tax plus a 20% penalty tax.

For families with multiple children, a family RESP allows CESG and investment income to be shared among beneficiaries, which reduces the risk that a single child not attending post-secondary strands the funds.