We often see parents or grandparents purchase an Registered Education Savings Plan (RESP) to ensure they give their children and grandchildren an education experience. Education is incredibly valuable, and it doesn’t come free – preparedness is key to covering these expenses when the time comes. RESPs are a fantastic savings vehicle with a lot of benefits – the growth on your investment, government matching grants and the ability to create RESPs that can be shared between siblings through a Family Plan. That said, many are unfamiliar with the tax implications of RESP withdrawals that may fall on the student rather than the subscriber (typically a parent or other relative).
What are RESPs comprised of?
RESP growth is based on two components: your contributions with interest and Canada Education Savings Grant (CESG) credits, which is grant money that is earned through a contribution matching system of 20% per annum, up to $7200 in one’s lifetime.
When can a student withdraw RESP funds?
In order to withdraw funds from an RESP, a beneficiary must meet certain criteria. The post-secondary studies must be full-time (over 10 hours of instruction per week for a minimum of 13 consecutive weeks) to receive the full maximum withdrawal amount. If the student attends part-time studies, they can withdraw a lesser amount as per CRA guidelines. All programs of study must meet criteria as well – for example, they must be part of an accredited post-secondary institution. The list is very broad and there is a full list of designated educational institutions in Canada here. It’s best to ask your RESP provider for specific criteria as it applies to your situation, but we have found many programs qualify.
What is taxable – and who is taxed?
When a student makes RESP withdrawals in order to pay for their college or university education, it’s called an Educational Assistance Payment (EAP). As stated on CRA’s website, An educational assistance payment (EAP) is the amount paid to a beneficiary from a Registered Education Savings Plan (RESP) to help finance the cost of post-secondary education (PSE). RESP promoters must follow specific rules when processing EAPs1. A beneficiary is the student and the promoter is generally a bank, or other financial institution that sells registered education savings plans (for example: CIBC).
RESP-generated income includes tax-free government grant money, but EAP payments are technically taxable and a student will be issued a T4A from their bank or other promoter. If you are the subscriber who has contributed to the RESP in a student’s name, you will not be taxed – that onus falls on the student alone. However, as students generally have limited earning potential while in school, they often do not pay income tax on these earnings. The exact tax situation will depend on the individual and the specifics of their income, RESP withdrawals and other income.
The Wooding Group has 31 years of experience providing our clients with effective saving solutions that fit their needs and goals. Over that time we have administered many RESPs and can offer assistance and advice on the tax management and spending strategies associated with RESPs. If you have any questions related to RESPs, our team would be pleased to address them and provide tailored advice to your personal circumstance. Please don’t hesitate to reach out to any of us at The Wooding Group to discuss!
The Wooding Group at CIBC Wood Gundy, 780 498-5047