Taking Money Out of an RESP

Source: BMO Global Asset Management

So, your child has graduated from high school,
and soon they’ll take the next big step in life by
heading off to college or university. Fortunately,
you’ve planned for this day by contributing to a
Registered Education Savings Plan (RESP). Maybe
your child has decided not to go to school or has
left school before completing his/her studies. In
any case, you will have some decisions to make on
how you withdraw the RESP funds. Here are some
considerations for withdrawing funds from your
child’s RESP.

RESP Contributions

The subscriber’s contributions can be returned to
the subscriber or the beneficiary (student) taxfree at any time. However, a withdrawal of the
RESP contributions will require a repayment of
the Canada Education Savings Grant (CESG) if the
beneficiary is not attending a qualifying educational
program at a post-secondary educational institution.

Educational Assistance Payments

An Educational Assistance Payment (EAP) is the
amount paid to a beneficiary from an RESP to help
finance the cost of post-secondary education. An
EAP consists of the CESG, the Canada Learning
Bond (CLB), amounts paid under a designated
provincial program (such as the Alberta Centennial
Education Savings Plan Grant or the Quebec
Education Savings Incentive) and the earnings
on the money saved in the RESP. The EAPs are
reported on a T4A slip (box 42) and are sent to the
student. The student includes the EAP as income on
his/her income tax return for the year the payment
was received.

EAPs are paid to students when:
• the student is enrolled in a qualifying
educational program (includes a postsecondary educational institution and those
enrolled in distance education courses, such
as correspondence courses, provided by such
institutions); or
• the student has attained the age of 16 years and is
enrolled in a specified educational program.
A qualifying educational program is an educational
program at the post-secondary school level, that
lasts at least three consecutive weeks, and that
requires a student to spend no less than 10 hours
per week on courses or work in the program.
A specified educational program is a program at the
post-secondary school level that lasts at least three
consecutive weeks, and that requires a student to
spend not less than 12 hours per-month on courses
in the program.
Post-secondary educational institutions include:
• A university, college, CEGEP, trade schools
or other designated educational institution in
Canada.
• An educational institution in Canada certified
by Human Resources and Skills Development
Canada (HRSDC) as offering non-credit courses
that develop or improve skills in an occupation.
• A university, college, or other educational
institution outside Canada that has courses at
the post-secondary school level, as long as the
student is enrolled in a course that lasts at least
13 consecutive weeks

A beneficiary is entitled to receive EAPs for up to six
months after ceasing enrolment at a post-secondary
educational institution, so long as the payments
would have qualified as EAPs if the payments
had been made immediately before the student’s
enrolment ceased.

Limit on EAPs

For RESPs set up after 1998, the maximum amount
of EAPs that can be made to a student as soon as he
or she qualifies to receive them is:
For Studies in a Qualifying Educational Program
• $5,000 for the first 13 consecutive weeks in such
a program. After the student has completed
13 consecutive weeks, there is no limit on the
amount of EAPs that can be paid if the student
continues to qualify to receive them. If there is
a 12-month period in which the student is not
enrolled in a qualifying educational program
for 13 consecutive weeks, the $5,000 maximum
applies again.
For Studies in a Specified Educational Program
• $2,500, for the 13-week period whether or not the
student is enrolled in such a program throughout
that 13-week period.

Accumulated Income Payments

Accumulated Income Payments (AIPs) are amounts,
usually paid to the subscriber, of income that has
accumulated in an RESP and is not:
• the payment of EAPs;
• payments to a designated educational institution
in Canada;
• the refund of contributions to the subscriber
or to the beneficiary;
• transfers to another RESP; or
• repayments under the CESG or under a
designated provincial program.

Considerations, if your child does not pursue
post-secondary studies

If the RESP beneficiary does not pursue postsecondary studies and another replacement
beneficiary is not named, the contributions can be
returned to the subscriber with no tax consequences.
However, don’t be too hasty to collapse an RESP.
It’s possible that your child may return for
schooling at a later date. You can keep the account
open for a maximum of 35 years. The Canada
Education Savings Grant can be shared with a
brother or sister if they have grant room available.
Otherwise, the grant must be returned to the
Government of Canada.
The subscriber may withdraw the income that has
accumulated in the plan if the following conditions
are met:
a) The subscriber is a Canadian resident;
b) The RESP has existed for at least 10 years; and
c) All beneficiaries under the plan are age 21
or older and not pursuing post-secondary
education.
The accumulated income may be withdrawn by the
subscriber without meeting (b) or (c) above if all
of the beneficiaries are deceased and were related
to the subscriber by blood or adoption or were the
niece, nephew, great niece or great nephew of the
subscriber. Canada Revenue Agency may also allow
an accumulated income payment to the subscriber
without meeting (b) or (c) if the beneficiary will be
unable to pursue post-secondary studies due to a
severe and prolonged mental impairment.
When the accumulated income is returned to the
subscriber, it is taxed in the subscriber’s hands
as ordinary income at normal tax rates plus an
additional 20 per cent tax is levied. The income tax
can be deferred and the 20 per cent tax avoided if the subscriber (excluding someone who became
a subscriber as a result of the death of the original
subscriber) has enough Registered Retirement
Savings Plan (RRSP) contribution room available.
Up to $50,000 of the income may be used to make a
regular or spousal RRSP contribution. So, if $50,000
of RRSP room is available, only the growth in excess
of $50,000 would be immediately taxed as income
and assessed the 20 per cent penalty.

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