If you are a Canadian working citizen with a child, you have most likely invested in your child’s Registered Education Savings Plan (RESP). It is a very helpful tool for financing your child’s education. Once you are done investing in this plan, you would want to withdraw it. For doing that, there are some RESP withdrawal rules that you should be familiar with. But first, various elements must be taken into consideration to allow you and your child to take full advantage of this investment. With guaranteed government grants of 30% (20% in Ontario), and the ability to grow the amounts invested tax-free, the Registered Education Savings Plan (RESP) is definitely a worthwhile investment. To take advantage of an RESP and properly plan withdrawals, it is important to fully understand how it works. Let’s get started.
RESP Withdrawal Rules: All You Need To Know
What does the RESP consist of?
The sums accumulated in an RESP are divided between the capital you have invested, as a subscriber and government grants and investment income, which, when withdrawn, equal Educational Assistance Payments (EAPs).
RESP Withdrawal Rules
It is up to you, as the subscriber who has contributed to the RESP, to decide how to split the withdrawal: EAP only or principal and EAP. The share of one and the other may vary with each withdrawal.
To obtain an EAP, all you need to do is provide proof of enrollment of your child, the beneficiary, in an eligible post-secondary program (at a vocational training center, CEGEP or educational institution university).
Chief characteristics :
- Educational Assistance Payment (EAP)
- Belongs to the subscriber (you).
- Non-taxable amount.
- Could be withdrawn in whole or in part, without limit.
- If the amount is withdrawn before the start of post-secondary studies, the grants are lost.
What to know to better prioritize withdrawals?
The capital: It continues to grow tax-free, even during the disbursement period.
Educational assistance payment:
- Grants and investment income are Educational Assistance Payments (EAPs) paid to the student.
- EAPs need to be planned well. They must be paid during the studies or within 6 months of the end of the studies.
- If your child does not pursue qualifying post-secondary education and the RESP must be closed, unused grants will need to be returned to the government. However, the RESP can be transferred to another RESP, or subject to a change of beneficiary, and if certain conditions are met, the grants could be retained.
- EAPs are taxable in the student’s name. The disbursement of this sum must be well planned in order to limit the taxation of your child and the fiscal impact (loss of tax credits) on you.
What about investment income?
If the RESP must be closed, you can withdraw the accumulated investment income still available in the RESP if you are eligible for an accumulated income payment (AIP). The AIP can be transferred to your Registered Retirement Savings Plan (RRSP), under certain conditions, or cashed in. In the latter case, the amount is taxable and additional tax applies.
What is the importance of a disbursement strategy in RESP?
Things to consider:
- Needs of your children during their studies.
- Your children’s total income (including EAPs) and access to certain tax credits. Generally speaking, if an individual’s taxable income does not exceed $13,808 in 2021, he does not pay income tax. However, students could benefit from certain tax credits (such as tuition fees, medical expenses, etc.) which will allow them to have an income higher than this threshold without having to pay income tax.
- Tax benefits for you, in connection with the addition of EAPs to your child’s income, in Quebec. Note that EAP amounts are added to the student’s declared income. This could have an impact on the tax credit related to the amount transferred by an adult child to post-secondary studies, since this credit gradually decreases as your child’s taxable income increases.
In any case, your advisor remains your best ally in developing a disbursement strategy that suits your family situation but this post should definitely help you develop a better understanding of RESP withdrawal rules.