The complexities of RESP withdrawals

It’s not really like an ATM

Registered Education Savings Plans (RESPs) are great ways to save for children’s future post-secondary education. Last time, I looked at how RESPs work and offered ulp some tips on how to get the most from from them. But what happens when it’s time to withdraw the funds and start paying the tuition bills? What if the beneficiary decideds not to go on to further studies? It’s not as easy as you might think. So here’s a guide to rigmarole around RESP withdrawals.

Withdrawal restrictions

Funds accumulated in an RESP and used as intended for full-time education are subject to few restrictions. The amount of Educational Assistance Payments (EAPs) withdrawn is limited to $5,000 until the student has completed 13 consecutive weeks in a qualifying educational program. Although normally, payments must be in support of qualifying full-time post-secondary education, payments in support of part-time education are permitted for students who cannot enroll full time due to physical or mental impairment.

It is possible under these plans for the original capital contributions to be returned to the contributor, tax-free, typically in the event that no related beneficiary qualifies by taking post-secondary education within the required time frame. However, withdrawals of RESP earnings to a contributor will be taxable income to the contributor (but not earned income for RRSP purposes).

A good planning tip would be to ensure that the returned plan earnings are contributed to an RRSP of the contributor or the contributor’s spouse or common-law partner to the extent that the contributor has adequate RRSP contribution room, as such transfers can be done on a tax-deferred basis.

Plan earnings received by the contributor that are not contributed to an RRSP (whether because they exceed RRSP contribution room or otherwise) are subject to a special tax of 20% in addition to regular income tax payable.

Most transfers from one RESP to another RESP will have no tax implications. This is the case when the transferring RESP and the receiving RESP have the same beneficiary. There are also no tax implications when a beneficiary under the transferring RESP has a brother or sister (under 21 years of age before the transfer is made, unless the receiving plan is a family plan) who is a beneficiary under the receiving RESP. In any other case, transfers can result in an excess contribution. This is because the RESP contribution history for each beneficiary under the transferring RESP is assumed by each beneficiary under the receiving RESP.

Canadian Education Savings Grant (CESG)

The government also provides additional RESP assistance of up to $500 per year for beneficiaries under 18 by providing the CESG to RESPs, based on 20% of annual contributions to a $2,500 ceiling (the payments are made directly to the RESP trustee).

Beneficiaries who are 16 or 17 in the year will receive a grant only where at least $2,000 of RESP contributions were made in respect of the beneficiary, or at least $100 in annual RESP contributions were made in any four years before the year in which the beneficiary reaches age 15.

The maximum total of grants per individual is $7,200 (note that this cannot be avoided by setting up multiple plans).

CESGs paid into family plans (i.e., plans with multiple beneficiaries, all of whom are related) on contributions made in respect of a particular beneficiary can be used for the education of other beneficiaries under the plan. However, the $7,200 ceiling applies to each beneficiary.

Withdrawals of contributions from an RESP for non-educational purposes, or a transfer from one RESP to another, will result in restrictions on future CESG payments in respect of beneficiaries under the plan. This is to prevent the “recycling” of RESP contributions to obtain grants under the new system.

Generally, RESPs may retain CESG funding until it is used to assist in the beneficiary’s post-secondary education or it has been determined that it will not be used for that purpose. When contributions are withdrawn for non-educational purposes from an RESP that has received a grant, the RESP trustee will be required to make a CESG repayment to the government equal to 20% of the withdrawal.

However, repayments will generally not be required for group plans that operate on the basis of “age cohorts” (i.e., traditional-type plans). In this case, the grants can be reallocated to other RESPs in the group arrangement.

The benefits of RESPs must be weighed carefully, not simply in tax terms, but with an understanding of plan provisions in the event that beneficiaries do not ultimately attend designated schools within the anticipated time frame.

Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate, estate, and international tax planning. She writes frequently on tax issues, and is the co-author of Tax and Family Business Succession Planning, 3^rd Edition. She is also co-editor of various Wolters Kluwer Ltd. tax publications. A version of this article first appeared in The TaxLetter, © 2022 by MPL Communications Ltd. Used with permission.

Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.