Personal Finance

How to minimize tax on RESP withdrawals.
By Gail Bebee | 31/08/12

As summer draws to a close, the high cost of a post-secondary education is top of mind for many students and their parents. The money needed to pay for tuition, books and living expenses could come from a number of sources: summer and part-time jobs, student loans, scholarships for a lucky few, and perhaps the bank of Mom and Dad. The necessary funds might even be salted away in a registered education savings plan (RESP).

About the Author
Gail Bebee est conférencière indépendante et enseignante dans le domaine des finances personnelles. Elle est aussi l'auteure du livre No Hype--The Straight Goods on Investing Your Money. On peut la joindre à gbebee@gailbebee.com; son site Web est www.gailbebee.com.

These registered accounts are a popular way for Canadians to save for their children's post-secondary education. A subscriber (a parent, guardian, family member or friend) contributes money over a number of years and receives lucrative financial incentives for doing so.

The income from investing the savings is tax-sheltered while inside the RESP. For each child who is a beneficiary, the federal government pays a Canada education savings grant equalling 20% of the subscriber's RESP contribution until age 17. (The annual maximum grant is $600, with a lifetime limit of $7,200.) Families with modest incomes and those living in Alberta and Quebec may qualify for additional grants.

RESP money can be withdrawn when the beneficiary pursues post-secondary education. Planning for this withdrawal should begin while the student is still exploring education options. He or she will want to confirm that a program qualifies for RESP payments.

An RESP-qualifying program must be post-secondary training that is either:

  • full-time study of three consecutive weeks or more in Canada
  • full-time study of 13 weeks or longer at a foreign educational institution, or
  • part-time education in Canada of at least 12 hours per month spent on courses.

Acceptable programs usually lead to a diploma or degree from a private or public educational institution including CEGEPs, trade schools, colleges, universities or other institutions certified by Human Resources and Skills Development Canada. Apprenticeships also qualify. Programs listed on the federal government's Master List of Designated Educational Institutions meet the government's requirements for RESP payments. You can call Canada Revenue Agency, toll-free 1-800-959-8281, and speak to an agent to confirm that an educational program is eligible.

Subscribers will also want to contact their RESP provider to verify that an educational program qualifies for RESP payments under their particular plan. Some plans may have additional restrictions such as limiting payouts to full-time students. At the same time, they should ask for details on the procedures for accessing RESP funds and request copies of any forms that will need to be completed to withdraw the money.

There is no need to wait until the student's program starts to apply for funds from the RESP. As soon as a beneficiary has been accepted into a qualifying program, the subscriber can submit the completed withdrawal form to the RESP promoter along with proof of enrollment. This will typically be a letter from the chosen educational institution detailing the beneficiary's name, enrollment status (full-time or part-time) and the program type, start date and duration. No expense receipts are required.

Mike Holman, author of The RESP Book: The Complete Guide to Registered Education Savings Plans for Canadians, advises that to best serve the financial circumstances of the subscriber and beneficiary, it is important to understand the type of RESP money being withdrawn.

No income tax is payable when the subscriber's original contributions are withdrawn to make a post-secondary education (PSE) payment. However, the accumulated income in the account, which includes the grants, capital gains, interest and dividends earned, are made to the beneficiary (the student) who must report the amount as taxable income. These withdrawals of the accumulated income are called Educational assistance payments or EAPs.

A subscriber of an RESP with more than one beneficiary should understand how the promoter apportions grant money and confirm that no one beneficiary will receive more than the $7,200 lifetime limit for grants.

There are no limits on the size of a PSE withdrawal. EAPs are restricted to $5,000 in the first 13 weeks of school for full-time programs and $2,500 for part-time studies. After that time, there are no limits on EAP withdrawals if the student is still studying.

If RESP funds remain after the student completes his education, or in the event he may not complete his studies, it makes sense to withdraw EAP money while the student is still in school or within six months of leaving. This will ensure unrestricted access to the funds and should minimize the tax owed.

When an RESP is closed, any residual grant money must be returned to the government. However, the grants as well as the original contributions and investing income may qualify for transfer to a sibling's RESP. Contributions will be refunded to the subscriber with no tax owing.

Any remaining investing income is normally only available if the RESP is at least 10 years old and the beneficiary is over 21. The money will be paid to the subscriber as an accumulated income payment (AIP) which is taxable and carries an additional 20% tax.

To avoid the extra tax, the subscriber may be able to transfer the AIP to her or her spouse's RRSP. If the RESP does not qualify for an AIP, the subscriber could give the remaining investing income to a designated educational institution, but will not receive a charitable donation receipt.

An RESP is an excellent way to save for a child's education. To maximize the value of RESP savings, planning for RESP withdrawals should begin before the student beneficiary decides on a specific post-secondary program.

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