CIBC Investor's Edge Exchange Fall 2018
CIBC Investor's Edge Exchange Fall 2018
CIBC Investor's Edge Exchange Fall 2018

Tax-Effective Ways to Get Funds out of RESPs

Jamie Golombek
Managing Director, Tax & Estate Planning, CIBC Wealth Strategies Group

“The first consideration is to keep in mind that contributions to RESPs are not tax deductible so they can always be withdrawn tax-free.”

Parents of kids attending post-secondary education are always trying to figure out how best to access the funds sitting in their Registered Education Savings Plans (RESPs) that they set up for the kids years ago.

An RESP is a tax-deferred savings plan that allows parents to contribute up to $50,000 per child towards saving for post-secondary education. The addition of federal government money in the form of Canada Education Savings Grants (CESGs) can add another $7,200 per child to the plan. Combine that with income earned and gains realized in an RESP but untaxed over the course of your kids’ childhood and you may be in the fortunate position of having a pile of cash to fund their education.

But what’s the most tax-effective way to access these funds?

The first consideration is to keep in mind that contributions to RESPs are not tax deductible so they can always be withdrawn tax-free (although CESGs may need to be repaid if no beneficiaries are attending school at the time). Any other funds coming out of the plan for a beneficiary’s post-secondary education are referred to as Educational Assistance Payments “EAPs”. EAPs include the income, gains and CESGs in the RESP. When these are paid out, they are taxable to the student on whose behalf the funds are paid.

In many cases, however, the student may not end up paying any tax on the EAPs withdrawn owing to the various personal tax credits available to students. Take, for example, a university student with no other source of income. She would be entitled to the federal basic personal tax amount ($11,635 in 2017) and the tuition amount ($6,000 for average Canadian undergraduate tuition), for a total of just over $17,000. That means that she would be able to receive up to about $17,000 in EAPs annually from her RESP in addition to any tax-free return of contributions. Previously the student was also entitled to claim the education amount and the textbook amount, however, these credits were eliminated as of the 2017 tax year.

My general advice, therefore, is to first withdraw the largest possible amount of EAPs annually, to use the student’s personal credits fully. The only limit on withdrawal of EAPs is $5,000 during the 13 weeks of enrolment for fulltime studies ($2,500 for qualified part-time studies). This limit can be waived on a case-by-case basis, with government permission.

If a student ceases to be “enrolled” in a qualifying post-secondary program, a 6-month grace period allows RESP beneficiaries to receive EAPs for up to 6 months after leaving the program, provided that the payment would have qualified if it had been made immediately before the student’s enrolment ceased. As a result, getting all the money out of the RESP after graduation is not a concern, as long as you act within the 6-month time limit.



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