Principles of RESP management

Withdrawal rules, transfers, and terminations

If you’re tapping into Registered Educations Savings Plans this fall to pay for your kids’ post-secondary schooling, keep in in mind that there are plenty of rules about how RESPs are administered. And some parents will have to deal with the question of what happens to the RESP if their child decides not to go on to post-secondary school just now. Here’s a look at what’s involved.

Educational Assistance Payments

To start receiving funds from an RESP (called Educational Assistance Payments, or EAPs), the student must be enrolled in a qualifying educational program (three consecutive weeks and 10 hours per week), including post-secondary institutions or distance education courses provided by them. In addition, a student is eligible to receive EAPs if they are age 16 and have enrolled in a specified educational program (three consecutive weeks and 12 hours per week).

A post-secondary institution is defined as
A university or college in Canada.
An ESDC-certified educational institution in Canada offering non-credit courses for occupational improvement skills.
A university or college outside Canada offering post-secondary courses at which the student was enrolled full-time for at least three consecutive weeks.
A university or college outside Canada at which the student was enrolled for at least 13 consecutive weeks.

For studies in a qualifying educational program, there’s a $5,000 maximum EAP ($2,500 for specified educational programs) that can be made to a student for the first 13 consecutive weeks. After that, there’s no limit on EAPs that can be made, provided the student continues to qualify to receive them. If the student drops out for 12 months, the $5,000 maximum applies again.

In some cases, the sponsoring company may also pay a portion of the RESP contributions to the student tax-free in addition to the EAP. But this depends on the terms of the RESP. Check with your RESP administrator.

Typically, EAP payments flow from the Canada Education Savings Grant, the Canada Learning Bond, amounts from provincial programs, and earnings on contributions in the RESP. The RESP sponsor reports EAPs for tax purposes on a T4A slip that is sent to the student, who in turn reports the EAPs on their tax return as income for the year they receive them. Presumably, the student will be in a low tax bracket and therefore pay little or no tax on the EAPs.

If your child does not go on to post-secondary education

So what happens to that hefty sum that’s accumulated in the RESP if your child may not want to go immediately on to post-secondary school, or chooses a different path altogether? Fortunately, there are many options available for RESP funds that are not immediately put to use for tuition.

* Keep the plan open. The rules say that RESPs can be left open for up to 36 years before the funds must be deployed. So there’s plenty of time for your child to decide what they want to do after high school. There’s no pressure and no rush. Funds in the RESP will continue to grow. If you haven’t contributed the maximum, consider topping up the plan during this period if your child simply wants to take a gap year but is still planning to go on to university later.

* Use funds for other programs. Remember that RESPs can be used for apprenticeship programs, as well as eligible trade and business schools. Likewise, RESP funds may be used for qualifying part-time education programs.

* Grace period. If your child enrolls but then decides to drop out, the rules allow for a six-month grace period for receiving an EAP. In this case, the beneficiary of an RESP is eligible to receive an EAP for up to six months after ceasing to be enrolled in a qualifying program, provided that they would have qualified while still enrolled.

* Transfer beneficiary. If the beneficiary of the RESP decides not to go ahead with post-secondary at all, the RESP may be transferred to another beneficiary – a sibling, for example. It’s important to check with the plan sponsor to learn more about how this can be done.

* Shutting down the RESP. If you are certain your child will not be attending post-secondary education, and there are no other beneficiaries available, you may terminate the RESP and have your original contributions returned to you tax free. Note, however, that you will pay tax on the income generated by those contributions (called Accumulated Income Payment, or AIP) at your top marginal rate plus an additional penalty of 20% (12% in Quebec). There is no capital gains tax on investment growth in an RESP. Any government top-up grant money through the Canada Education Savings Grant and the Canada Learning Bond received by plan must be returned to the government.

* Transfer to RRSP. To defer tax on the AIP and avoid the 20% penalty on terminating an RESP, you may be able to transfer up to $50,000 of AIP to your or your spouse’s RRSP, provided you have contribution room available and the RRSP allows this type of transfer. You would have to include the amounts transferred in your income and deduct the same amounts as contributions to your RRSP, making the AIP transfers a wash as far as any deduction for RRSP contributions go. You can only do this manoeuvre if the RESP has been open for at least 10 years, your child is 21 or older and has decided not to go on to post-secondary, and you are a Canadian resident.

The original contributions are yours to do with as you please, and may present a good opportunity to top up your, your spouse’s, or your child’s RRSP contribution room – and get the deduction. You might also consider topping up TFSAs in the same way.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.