Kevin Greenard outlines a step-by-step process for withdrawing from a Registered Education Savings Plan.
As summer draws to a close, 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 that school year, is time to consider withdrawing from this RESP to help cover the cost of their education.
The purpose of this article is to describe step by step the process of withdrawing from an RESP.
Step 1: Meet your portfolio manager
For all of our RESP clients, as the beneficiary(ies) approach high school graduation, we sit down and develop a plan for their upcoming RESP cash flow needs.
We put these cash needs aside in a cash equivalent, so that they are ready for the start of the school year. We also have a first discussion to understand the beneficiary’s study plans.
Step 2: Confirm facility eligibility
The first step is to determine if the beneficiary’s chosen post-secondary institution, program and related expenses are eligible for RESP withdrawals.
To be considered an eligible 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 enhance skills in an occupation.
• A university, college or other educational institution outside Canada that offers post-secondary education, where the beneficiary is enrolled full-time.
If you are unsure whether the beneficiary’s post-secondary educational institution is eligible, you can visit the Government of Canada website for a complete list of Canadian accredited educational institutions.
In order to be considered an eligible study program, it must meet certain criteria depending on whether it is a full-time, part-time or outside of Canada (full-time only) program, as following :
• The program must last at least three consecutive weeks; and
•The student must devote at least ten hours per week to the program.
• The program must last at least three consecutive weeks; and
• The student devotes at least 12 hours per month to the program; and
• The student must be 16 years of age or older.
Full time outside of Canada
• The program must last 13 consecutive weeks or a minimum of three weeks for university programs.
There is no fixed list of expenses considered eligible (or ineligible) and the recipient is not required to submit receipts (unless they want to withdraw more than the maximum annual amount of assistance payments to studies). For this reason, there are few restrictions on how the funds are spent, as long as they are spent for educational purposes.
Eligible expenses are grouped into three main categories as follows:
• Education costs: These include items such as tuition, compulsory school fees, books, etc. These can also include any equipment needed to attend school, such as a laptop, calculator, lab equipment, etc.
• Living expenses: such as housing, food, clothing, transportation, etc.
• Expenses related to special needs: Expenses incurred related to special needs such as note takers, interpreters, etc.
Step 3: Proof of registration
Once you have determined that the recipient’s institution is eligible, their program is eligible, and they have educational costs, the next step is to obtain proof of enrollment.
Proof of registration can usually be obtained from the Registrar’s office. Many post-secondary institutions also have a student portal that allows the student to log in and upload proof of enrollment themselves.
Unfortunately, a letter of acceptance, copies of student ID cards or cash register receipts are not considered valid proof of registration and will not be accepted.
To be accepted, proof of registration must include:
• A letter/document on letterhead from the educational institution, preferably containing the name and full address of the institution (including postcode).
• The letter/document must be dated at the time.
• The student’s name (and student number, if available) must be included in the letter/document.
• The wording in the letter/document must indicate that the student is currently enrolled at this educational institution and the program in which the student is currently enrolled.
• Registration status: full-time or part-time.
If you are unable to obtain an enrollment letter/document as stated 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 the proof of registration is valid for six months from the date indicated on the document.
Step 4: Determine the type of RESP withdrawal to make
Withdrawals from an RESP are divided into two categories: Educational Assistance Payments (EAPs) and Post-Secondary Education Payments (PSE).
EAPs include both income earned in the plan over the years (such as capital gains, interest and dividends) and government incentives (Canada Education Savings Grant and Learning Bond canadian).
EPS are made up of the initial capital contributions made by the subscriber (the person who opened the plan).
EAPs and PSEs differ in their annual limits and tax characteristics, which we have summarized in the table below:
Educational Assistance Payment (EAP)
Income earned under the plan: capital gains, dividends, interest; and
Full time: $5,000 for the first 13 weeks of study, up to a maximum of $25,265 in 2022 without receipts. If receipts are provided for reasonable expenses, amounts over $25,265 may be withdrawn.
Part time: $2,500 for every 13 weeks of study.
The full amount of the EAP is taxable in the hands of the beneficiary. The beneficiary receives a T4A and must report the EAP withdrawal as income.
Payment for Post-Secondary Education (PSE)
The PSE is made up of the main contributions made by the subscriber (ie the person who opened the plan).
No tax consequences since the main 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 main advantages of an RESP is that it allows funds to be invested and grow tax-free over the life of the RESP. Then, when they are withdrawn at a later date, they are taxed in the hands of the beneficiary. The beneficiary is likely to be in a lower tax bracket while in school and may pay little or no tax on the amount.
If your child is earning income from a job, such as a summer job, co-op, or internship, it’s worth taking more EAPs during the low-income years. As part of our initial RESP discussion with our clients, we determine the amount of EAPs available in the RESP account and the amount of each withdrawal.
We always recommend using the entire EAP while the beneficiary is pursuing post-secondary education. If their RESP continues after the beneficiary completes education, or if the beneficiary never pursues post-secondary education, the RESP must be closed after 35 years.
If so, onerous special rules apply to any EAPs remaining in the RESP. Grants and bonds must be returned to the government, and income earned under the plan is included in the subscriber’s income and taxed at their marginal tax rate, plus a 20% penalty tax. It is possible to transfer income earned under the plan to a registered retirement savings plan (up to $50,000), provided there is space.
Due to the punitive nature of these rules, we always assist our clients in developing an RESP wind-up plan while the child attends school.
Step 5: Make the RESP withdrawal
To make the RESP withdrawal, the subscriber must sign a form detailing the beneficiary’s information, details of their post-secondary program, and details of the source of the withdrawal (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, the registered bank account, 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 strategy.
Kevin Greenard CPA CA FMA CFP CIM is Senior Wealth Advisor and Portfolio Manager, Wealth Management, at The Greenard Group of Scotia Wealth Management in Victoria. His column appears weekly on timescolonist.com. Call 250-389-2138, email [email protected] or visit greenardgroup.com.