How to withdraw funds from RESPs

Eventually you have to pay the tuition bill

Around about this time of year, the great Canadian university hunt gets into full swing. Students have generally made their applications, checked their programs, and visited the universities. Offers of admission start trickling in, and you’ll have to decide which one to accept starting at the beginning of June. In the fall, the kids go off to college. And then the tuition bills come in. That’s when it’s time to start making withdrawals from Registered Education Savings Plans (RESPs), if you had the foresight to set one up, say, 15 years ago! The rules for RESP withdrawals are fairly simple, but there are a few wrinkles to be aware of (especially if your child decides not to continue with post-secondary education).

Withdrawals

Students can begin receiving payments (called Educational Assistance Payments, or EAPs) towards tuition from the RESP as soon as they are enrolled in a qualified post-secondary educational program, including colleges and universities, apprenticeship programs offered by trade schools, and CEGEP in Quebec. For Canadian residents, the payments consist of funds contributed to the RESP and earnings on those funds, the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB) for eligible students, and any provincial savings programs the student may be eligible for.

Because the EAPs are considered income for the student, the student will have to file a tax return reporting that income. However, because the student is likely in the lowest tax bracket, and because various other deductions (including tuition, education, and textbook amounts, interest on student loans, and moving expenses among others) will reduce that income considerably, there will very probably be no tax to pay on RESP withdrawals at all.

Foreign universities

If the student has applied to and been accepted at a foreign university, there are some wrinkles to the RESP withdrawal rules. A university or college outside Canada qualifies as a post-secondary institution eligible for EAPs, provided the student has been enrolled full-time in a course of not less than three consecutive weeks and remains a resident of Canada.

The rules for eligibility for the Registered Education Savings Plans are pretty clear. According to the Canada Revenue Agency, “...you can designate an individual as a beneficiary under the RESP only if the individual’s social insurance number (SIN) is given to the promoter before the designation is made; and the individual is a resident of Canada when the designation is made.”

Residency requirements

Residency status is a bit trickier. Even if you are a Canadian citizen, Canada Revenue Agency rules state that you are a non-resident for tax purposes if you:

* Normally, customarily, or routinely live in another country and are not considered a resident of Canada; or
* Do not have significant residential ties in Canada; and you live outside Canada throughout the tax year; or you stay in Canada for less than 183 days in the tax year.

In the case of grandparents looking to set up RESPs for grandkids living in the U.S., it appears they’re out of luck. To qualify for RESP benefits, the grandchildren would have to be residents of Canada at the time the RESP is set up, and they would need to have Canadian Social Insurance Numbers. They would also have to be residents of Canada to qualify for the CESG and be eligible for other grants and incentives. And they would have to remain residents of Canada to receive the full EAPs for attending a post-secondary school outside Canada.

What if your child doesn’t go on to post-secondary education?

Sometimes your child will not go on to university or college immediately, or may go directly into the workforce on graduating high school. So what happens to an RESP in that case. The rules say you have five options:

1. Leave the RESP open. An RESP can be left open for up to 35 years. This is a good option if the beneficiary decides to go back to post-secondary education in a few years’ time.

2. A new beneficiary. The rules allow you to name another beneficiary if it’s an individual plan. In the case of a family RESP, the funds can simply be applied to any other child named under the plan.

3. RRSP transfers. Up to $50,000 in earnings in the RESP may be transferred to an RRSP. The beneficiaries must be at least age 21 and not continuing post-secondary education, the RESP has to have been open for at least 10 years, you are a resident of Canada, and you have sufficient contribution room in your RRSP.

4. Collapse the RESP. If you decide to close the RESP, you must return all grants and bonds to the government. Your contributions are returned to you. However, investment earnings will be given to you only if the plan has been open for 10 years, the beneficiaries are at least 21 years old and not continuing post-secondary education.

5. RDSP transfers. In certain cases it may be possible to transfer investment earnings from an RESP to a Registered Disability Savings Plan (RDSP), if any one of these conditions is met: the beneficiary has a severe and prolonged mental impairment; the RESP has been open for at least 10 years and the beneficiary is at least age 21; the RESP has been open for at least 35 years.

In all of these cases, it’s important to check with the sponsor of your RESP to see if these options are available under the terms of your plan. Check well in advance of heading off to school in the fall. Or consult with your financial advisor if they’ve helped you set up your plan.

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.