As summer comes to an end, a new school year begins. If you set up a Registered Education Savings Plan for a beneficiary — such as a child, grandchild or other family member — and that beneficiary is enrolled in a post-secondary education program for this school year, it’s time to consider withdrawing from that RESP to assist with covering the costs of their education.
The purpose of this article is to outline the step-by-step process to withdraw from an RESP.
Step 1: Meet with your Portfolio Manager
For all our clients with RESPs, as the beneficiary(ies) are approaching high school graduation, we sit down and map out a plan for their upcoming cash flow needs from the RESP.
We set those cash flow needs aside in a cash equivalent, so they are ready for when school starts. We also have an initial discussion to get an understanding of the beneficiary’s education plans.
Step 2: Confirm institution eligibility
The first step is to determine if the beneficiary’s chosen post-secondary institution, program and related expenses qualify for RESP withdrawals.
In order to be considered a qualifying post-secondary institution, it must be:
• A university, college, trade school, or other designated educational institution in Canada.
• An educational institution in Canada certified by Employment and Social Development Canada (ESDC) as offering non-credit courses that develop or improve skills within an occupation.
• A university, college, or other educational institution outside Canada that provides courses at the post-secondary level, where the beneficiary is enrolled on a full-time basis.
If you are unsure if the beneficiary’s post-secondary institution qualifies, you can visit the Government of Canada website for a full list of Canadian designated educational institutions.
In order to be considered a qualifying program of study, there are certain criteria it must meet depending on whether it is full time, part time or outside of Canada (full time only), as follows:
Full time
• The program must run for at least three consecutive weeks; and
•The student must spend at least ten hours per week on the program.
Part time
• The program must run for at least three consecutive weeks; and
• The student spends at least 12 hours per month on the program; and
• The student must be 16 years of age or older.
Full time outside of Canada
• The program must run for 13 consecutive weeks, or a minimum of three weeks for university programs.
There is no set list of expenses that are considered eligible (or ineligible), and the beneficiary is not required to submit any receipts (unless they are wanting to take out more than the maximum annual amount of Educational Assistance Payments). Because of this, there are few restrictions on how the funds are spent, so long as they are spent on educational purposes.
Qualifying expenses are grouped into three broad categories as follows:
• Education costs: These include items such as tuition fees, mandatory student fees, books, etc. These could also include any equipment required to attend school such as a laptop, calculator, lab equipment, and so on.
• Living expenses: Such as shelter, food, clothing, transportation, etc.
• Expenses related to special needs: Costs incurred related to special needs such as note-takers, interpreters, etc.
Step 3: Proof of enrolment
Once you have determined that the beneficiary’s institution qualifies, their program is eligible, and they have educational expenses, the next step is to obtain proof of enrolment.
Proof of enrolment can typically be obtained from the registrar’s office. Many post-secondary institutions also have a student portal that allows the student to log in and download the proof of enrolment themselves.
Unfortunately, a letter of acceptance, copies of student cards, or cashier’s receipts are not considered valid proof of enrolment and will not be accepted.
In order for the proof of enrolment to be accepted, it must include:
• A letter/document on the educational institution’s letterhead, preferably containing the institution’s name and complete address (including postal code).
• The letter/document should be currently dated.
• The student’s name (and student number, if available) should be in the letter/document.
• Phrasing in the letter/document should state that the student is currently enrolled in that educational institution and the program in which the student is currently enrolled.
• Enrolment status: full time or part time.
If you are unable to obtain an enrolment letter/document as detailed above, an invoice from the educational institution may also be accepted if the above information is on the invoice.
It is important to note that proof of enrolment is valid for six months from the date shown on the document.
Step 4: Determine the type of RESP withdrawal to make
RESP withdrawals are split into two categories: Educational Assistance Payments (EAPs) and Post-Secondary Education Payment (PSEs).
EAPs consist of both the income earned within the plan over the years (such as capital gains, interest, and dividends), and incentives from the Government (Canada Education Savings Grant and Canada Learning Bond).
PSEs consist of the original principal contributions made by the subscriber (the individual who opened the plan).
EAPs and PSEs differ in their annual limits and taxation characteristics, which we have summarized in the below table:
|
Type of withdrawal |
Source |
Limit |
Taxation |
|---|---|---|---|
|
Educational Assistance Payment (EAP) |
Income earned within the plan: capital gains, dividends, interest; and
|
Full time: $5,000 for the first 13 weeks of study, to a maximum of $25,265 in 2022 without receipts. If receipts are provided for reasonable expenses, amounts in excess of $25,265 may be withdrawn.
Part time: $2,500 for each 13 weeks of study. |
The full amount of the EAP is taxable in the beneficiary’s hands. The beneficiary receives a T4A and must claim the EAP withdrawal as income. |
|
Post-Secondary Education Payment (PSE) |
PSE consists of principal contributions made by the subscriber (i.e. the individual who opened the plan). |
No limit. |
No tax consequences as the principal contributions were made by the subscriber with after-tax dollars. |
When determining the type of RESP withdrawal to make, it is important to understand the tax implications of the withdrawal.
One of the key benefits of an RESP is that it allows the funds to be invested and grow tax sheltered over the life of the RESP. Then, when they are withdrawn at a later date, they are taxed in the beneficiary’s hands. The beneficiary is likely in a lower tax bracket while in school and may pay little or no tax on the amount.
If your child has any income from employment such as a summer job, co-op, or internship program, it is worth withdrawing more EAP in lower-income years. As part of our initial RESP discussion with our clients, we determine how much EAP is available in the RESP account and the amount in each withdrawal.
We always recommend using all the EAP while the beneficiary is attending post-secondary education. If their RESP continues on after the beneficiary has finished with school, or the beneficiary never attends post-secondary education, the RESP must be collapsed after 35 years.
If this is the case, special onerous rules apply to any EAP remaining in the RESP. The grants and bonds must be returned to the government, and income earned within the plan is included in the subscriber’s income and taxed at their marginal tax rate, plus a penalty tax of 20 per cent. There is a possibility of transferring the income earned within the plan to a Registered Retirement Savings Plan (up to $50,000), provided you have the room.
Because of how punitive these rules are, we always help our clients map out a plan to wind the RESP up while the child attends school.
Step 5: Complete the RESP withdrawal
To complete the RESP withdrawal requires the subscriber’s signature on a form detailing the beneficiary’s information, details of their post-secondary program and details of where the withdrawal is coming from (capital or EAP).
From there, we submit it along with the proof of enrollment form for processing. The withdrawal can either be transferred to the subscriber’s non-registered Scotia Wealth Management investment account, bank account on file, to the beneficiary’s bank account, or directly to the post-secondary institution.
Speak to your professional tax advisor about your particular facts and circumstances when evaluating and before implementing any tax planning strategies.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com, or visit greenardgroup.com.
