To Wei it feels like just yesterday that his only child, Lily, took her first few hesitant steps. But this fall she's heading off to university. And, suddenly, all those contributions he's been making to a Registered Education Savings Plan (RESP), along with the grant monies from the Canada Education Savings Grants (CESG), need to be used for their intended purpose - paying for Lily's education.
Many Canadians, like Wei, spend years contributing to an RESP without thinking too much about how the money will come out. When Wei sits down with his CIBC Financial Advisor, here's what he learns.
How to start the money flowing
Wei calls his CIBC Financial Advisor and sets up a meeting to start the RESP withdrawal process. His CIBC Financial Advisor reassures him that he will walk him through all the necessary steps and asks Wei to bring along proof that Lily is attending a qualifying educational program, such as:
- A letter of admission/enrolment (confirmation of acceptance may not be not enough)
- A fee-schedule invoice
These documents must include the name of the post-secondary institution and Lily's name.
How the government treats withdrawals
The money in an RESP is divided into two categories:
Post-Secondary Education Payments (PSEs) are the sum total of Wei's contributions to the account. After Lily starts her program, PSEs can be withdrawn in whole or in part, for any reason, and they are not taxable. Even if Lily doesn't complete her program, PSEs can go back into any account Wei chooses with no tax consequences because they are composed exclusively of money he contributed.
Educational Assistance Payments (EAPs) comprise the non-contributions to the account, including Canada Education Savings Grants (CESGs), Canada Learning Bonds (CLBs), Provincial Grants/Incentives where applicable (Alberta Centennial Education Savings (ACES) and Quebec Education Savings Incentive (QESI)) and investment growth.
EAPs are taxed as regular income in Lily's hands. There are no withholding taxes and she will receive a T4A tax slip. Lily's marginal tax rate on the EAP will likely be fairly low, even if she earns income from a part-time or summer job. She may also be able to claim tuition, education and textbook tax credits against her EAP and other income.
Who receives the money?
When Wei requests a RESP withdrawal, he must specify how much he wants as PSEs and how much as EAPs. PSEs can go either to the RESP subscriber, Wei, or to the RESP beneficiary, Lily. EAPs must go to Lily unless Lily provides consent to have the EAPs go to Wei.
Note that Lily can access up to $5,000 in EAPs during the first 13 consecutive weeks of her full-time program. After 13 weeks, this limit doesn't apply as long as she was in full-time studies within the prior 12 months. If she was in a part-time program, lower limits would apply.
Develop a withdrawal strategy with your CIBC Financial Advisor
Your CIBC Financial Advisor can help you decide how much to withdraw in PSEs and how much to withdraw in EAPs. He or she can also advise you on the most effective strategies if your children don't complete their studies.
Wei's CIBC Financial Advisor points out that EAPs that remain in Lily's individual plan after the 35-year maximum life of an RESP can only be withdrawn as Accumulated Income Payments (AIPs) under certain conditions and subject to regular income tax plus 20% - though up to $50,000 in AIPs can be rolled directly into Wei's and/or his wife's RRSPs if they have contribution room available. Furthermore, when an RESP is collapsed with EAPs or accumulated income still inside it, CESGs must be repaid to the government. As a result, it's generally best to withdraw EAPs before PSEs - but Wei's CIBC Financial Advisor can help him decide what works best for his personal situation.
In addition, Wei's CIBC Financial Advisor recommends that the family keep records of how EAPs are spent in case there's ever an audit. It's important to be able to prove that EAPs were used for expenses that help Lily further her post-secondary education.
RESP rules are complex. A good starting point is to meet with your CIBC Financial Advisor to discuss your child's education cash flow needs while studying. Then establish a withdrawal plan that will effectively use the money you have saved, through contributions and government grants, to fund your child's education.