You’ve spent years saving for your child’s post-secondary education. What happens when it’s time to use the money?
In Canada, the most popular education savings vehicle is the Registered Education Savings Plan (RESP). That’s because the government offers a 20% grant called the Canada Education Savings Grant (CESG), to a lifetime maximum of $7,200 per child. In addition, modest income families can qualify for the Canada Learning Bond (CLB).
Ultimately, when your child begins their post-secondary education, money must be withdrawn from the RESP account. Because of the rules around RESP withdrawals, you should consider some strategies to make your withdrawals as efficient as possible and to avoid paying back unused funds to the government.
1. Understand what to withdraw first
There are different types of money in an RESP account: the original contributions to the plan, any grants and bonds received and investment growth on all funds in the account.
When you withdraw, the original contributions (called Post-Secondary Education withdrawals) are not taxable. But the CESG, CLB and any investment growth —called the Educational Assistance Payment (EAP) — are taxable.
What’s more, if your child finishes school and there is still money in their RESP, any CESG/CLB money remaining in the plan must be paid back to the government. To avoid a potential CESG/CLB payback, be sure to withdraw as much EAP as possible before withdrawing your original contributions.
What to do: On your RESP withdrawal form, you can indicate which money you’re withdrawing: your original contributions (PSE) or grants/investment growth (EAP). Choose the EAP first.
2. Understand how much you can withdraw
In your child’s first 13 weeks of post-secondary school, you can withdraw a maximum of $5,000 in EAP money. After that, there’s no restriction on how much you can withdraw.
What to do: The EAP is taxable in the hands of the student. Most students have little to no income, and they get the basic personal income tax exemption (which means they won’t pay tax on the first $14,398 of income in 2022) as well as tuition tax credits. Make sure that you’re not withdrawing too much of the EAP in a year, especially if your child has a part-time job or other source of income.
3. Withdraw as much as possible before your child finishes school
What happens if you have money in the RESP after your child has completed their post-secondary education? If the money is considered as your original contributions, you can withdraw it without any tax consequences whatsoever. You can do whatever you’d like with the money. But if you still have CESG money, that amount must be repaid to the government.
What to do: Since there’s no restriction on how much you can withdraw, make sure you’re withdrawing all the EAP before your child finishes school.
If your child does not pursue or expect to complete their post-secondary education, and you still have funds in the RESP account (beyond your original contributions), you could receive those funds as an accumulated income payment (this is the investment growth). Any remaining CESG/CLB money would have to be repaid.
4. Don’t collapse the plan too early
If your child decides not to attend a qualifying education program, the RESP must eventually be collapsed. However, it’s quite possible that they may decide to pursue other avenues for a while and then go back to their post-secondary education at a later time. Therefore, collapsing the plan early could turn out to be a mistake, as the money may be needed later for tuition and other school-related expenses. You can keep the RESP open for up to 36 years.
Although there are other methods of saving available, the RESP is the primary vehicle of choice when it comes to education savings. To learn more about RESPs, contact your MD Advisor*.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.