Kevin Greenard: Utilizing RESP funds for post-secondary education

Kevin Greenard

Parents and grandparents who set up a Registered Education Savings Plan (RESP) are referred to as the “subscriber”. The children or grandchildren are referred to as the “beneficiary” of the registered plan. It is the subscriber that we communicate with respect to both contributions and withdrawals.

When the time arrives that the beneficiaries are pursuing higher education, we meet with the subscriber to ensure they understand fully how to retrieve the funds from the RESP. Specifically, we will review the documentation required, confirm the taxation of the withdrawals, and suggest the best strategy based on the beneficiary’s education and work plans. Below are some of the common talking points that we highlight for our clients.

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Proof of Enrolment

Before making any withdrawals from a RESP for education, proof of enrollment must be provided and specific information is also required for the proof of enrollment document:

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;

Enrollment status: full-time or part-time;

OR

If you are unable to obtain an enrollment letter/document as detailed above, an invoice from the educational institution may also be accepted if the above information is on the invoice.

RESP withdrawals not just for tuition

One misconception is that the proceeds from a RESP can only be used to pay for tuition and textbooks. Withdrawals can be used to pay for all post-secondary education costs. Tuition and textbooks are only part of the cost of education. Being able to have funds set aside for housing, living costs for school, and transportation is important to add to the calculation. The RESP can help cover the costs of all of these expenditures.

Internal system for RESP accounts

The monthly statements that you receive for a RESP look very much like any other type of statement. Behind the scenes, your financial institution that administers the RESP is required to track the total equity of the plan into three categories. The first category is called “Capital” which is the total amount of all contributions made to the plan since the plan was opened. The second category is called “Incentives” which is the total amount of both provincial and federal grants. Last week we talked about how to take advantage of the Canada Education Savings Grant (CESG), the most popular federal grant. The third category is called “Income” which is the total amount accumulated on the investment of both the Capital and Incentives. This can be interest income, dividend income, and net realized and unrealized capital gains. We will proactively print off our internal report and provide it to our clients (subscriber).

The monthly statement sent to clients, either by mail or paperless, lists all the investments and is useful to track the total market value and underlying holdings. Our internal system report can be printed off manually and we provide it to clients when discussing the RESP or any time upon request. The internal report that we can provide to clients will outline the capital, incentives, and income. This report does not list the investments but breaks down these three main categories. For example, Mr. and Mrs. Miller have a RESP for their 18 year old daughter. The monthly statement now shows a total market value of $83,900 as of August 31, 2020. The internal system report may show capital of $36,000, incentives of $7,200, and income of $40,700.

If you have not seen a copy of this RESP breakdown, we encourage you to request the internal system report showing the breakdown. One of the side benefits of requesting this report is the ability to track the overall performance (the “income”) of the RESP. Below we will highlight another important reason to request this information.

Confusing terminology

The financial industry has several terms that often mean the same thing. Most financial professionals will use the term “contribution” to refer to “capital”. On the RESP withdrawal form, the term “Education Assistance Payments” (EAP) is the sum of both incentives and income. This is important to know when we look at the taxation of withdrawals.

Instructions for withdrawal

Other than valid proof of enrolment, and a form signed by the subscriber, getting the funds out of a RESP is straight forward. The subscriber must provide details on how they want the capital part paid out and how they want the EAP part paid out. The options for how the funds are paid out are very flexible, and include: cheque to subscriber, cheque to beneficiary, cheque to another individual or institution (i.e. university), cheque at branch, credit to the subscriber’s non-registered account, etc. Many clients have believed that all withdrawals must go to the beneficiary, but this is not the case. If the client (subscriber) has already paid the tuition receipt in advance of the withdrawal, and other education related expenses directly, then it is reasonable that the RESP withdrawal would be paid to the subscriber rather than the beneficiary. In other cases, we have seen grandparents contribute into a RESP to ensure the grandchildren receive the CESG and the income. When it comes to withdrawals, the grandparents will request the capital component be paid back to them and the EAP portion is paid to the grandchild. The key point we want to highlight is that the subscriber has the flexibility to do different combinations of withdrawals.

Taxation of withdrawals

Once the beneficiary is enrolled in a qualified post-secondary education institution, then we have a conversation about the taxation of withdrawals. The initial contributions from the subscriber are not taxed, regardless of who those payments are made to upon withdrawal. As noted above, this portion of the RESP can be paid out, with no tax implications, to the subscriber, beneficiary, or other – it is the subscriber who dictates how those funds are dispersed.

The CESG and the income earned (dividends, interest, and capital gains) are both taxed in the hands of the beneficiary as EAPs when taken out. The firm you have the RESP through is referred to as the promotor and must issue a T4A tax slip, for the EAP portion, to the beneficiary in the year of withdrawal. In most cases, we try to spread the EAP portion over four years (or the length of the program). The beneficiary will likely have limited other income while going to school. In the majority of cases, the end result is zero tax being paid on the CESG and the growth within the RESP.

Your tuition, education and textbook amounts

The federal government eliminated the education and textbook tax credits in 2017. Students are still able to deduct eligible tuition fees paid for the tax year. A course typically qualifies for a tuition tax credit if it was taken at a post-secondary education institution or for individuals 16 or older who are taking a course to develop skills in an occupation and the institution meets the requirements of the Employment and Social Development Canada (ESDC). The institution should issue a T2202A (Tuition and Enrolment Certificate) at the end of the year which lists the total paid in the calendar year that is eligible for the student to claim on his or her income tax return. The student must claim the amount paid even if mom and dad paid the tuition. The student must first try to use the credits on their own tax return. Schedule 11 of the student’s tax return will list the total eligible tuition fees and the total tuition amount claimed by the student.

Tuition amount

What if the student has limited or no income to utilize the tuition amount? The student has the ability to either carry the tuition amount forward to future years or transfer up to $5,000 of the tuition amount to their spouse, common law partner, parent, or grandparent. It is a convoluted calculation and at first might seem a little strange. I will illustrate with a student who has tuition costs of $9,300. During the year, the student earns $13,500 in taxable income. On Schedule 11 that we referred to above, the student can claim some reductions of this. To keep things simple, we will assume only the basic exemption of $11,809 (2018) is available. The net amount is $1,691 ($13,500 - $11,809) and the student must first use this. The $9,300 total tuition amount is reduced by $1,691 (the amount claimed by the student). The tuition amount remaining is $7,609 ($9,300 - $1,691). Above I mentioned up to $5,000 can be transferred to your spouse, common law partner, parent, or grandparent. The maximum amount that can be transferred is $5,000 less the amount the student is claiming, which in this case is $5,000 - $1,691 which equals $3,309. The student will then be able to carry forward, to future years, the difference of $4,300 ($9,300 less $1,691 claimed by student and $3,309 transferred in the current year).

When I review Canada Revenue Agency issued notices of assessment on behalf of clients, I will sometimes see unused tuition carry forward credits from previous years. Tuition amounts are non-refundable tax credits. This essentially means that in the past the client did not have any taxes to pay and was therefore unable to transfer the tuition amounts. Once the tuition amounts are carried forward to another year, they are not able to be transferred. Although past carry forward tuition amounts did not provide an immediate tax benefit, they may have a current or future value. If you’re not sure how current tuition costs should be claimed or transferred, we recommend you speak with your accountant.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138. greenardgroup.com

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