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Tax efficient RESP withdrawals

A lesson in handling RESPs

There’s no question a registered Education Savings Plan (RESP) is an important savings vehicle in an era when higher education is a valued commodity and tuition costs are rising.

The RESP is the only financial instrument that tops up your contributions by up to 20 per cent through the federal Canada Education Savings Grant (CESG) – or more, in some provinces – and empowers your contributions to grow on a tax-deferred basis.

Your child should pay little or no tax on RESP withdrawals. You can withdraw your contributions from the RESP on a tax-free basis and use them for any purpose, including assisting the beneficiary (the student) in school.

You should wait to start withdrawing from your contributions until the beneficiary has enrolled in post-secondary education though, because if you make a withdrawal from contributions prior to that time, the withdrawal will cause a claw-back of CESG.

You can direct a withdrawal of the RESP income and CESG by way of an Educational Assistance Payment (EAP). EAPs are taxable to the beneficiary (the student), not the contributor (you). This is advantageous because most students are in a low tax bracket, often with unused personal credits, so there’s usually no (or very little) tax owing.

Depending on your student’s plans for the future and the possibility of earning income during their post-secondary years (for example through a paid internship or working for a family business), it makes sense to do in-depth tax planning before the student makes their first withdrawal.

In addition to tuition, RESP withdrawals can be used to pay for any expense related to post-secondary education: books, residence, living expenses, even trips home. Proof of enrolment at an accredited institution in an eligible educational program is usually all that’s needed as documentation.

Start by sitting down with your student, at least six months before they start university, and calculate how much their education will cost, all-in. You may want to allocate those funds equally over the years they’ll be an undergraduate or hold some back for graduate school.

Keep in mind that tuition and living expenses vary by institution and program. For example, an engineering program will charge higher tuition than a general arts program at the same institution, because of the long-term earning potential it offers.

An RESP is made up of three components, each with different tax implications. And you can decide to some degree where withdrawals come from out of these three “buckets”:

1. Contributions — Your RESP contributions can be withdrawn tax-free.

2. Government grants, including CESG — Grants are taxable as Educational Assistance Payments (EAPS).

3. Income Earned on Investments — Income earned on investments within the RESP is taxable as Educational Assistance Payments (EAPs ).

It’s important to set a time horizon for your student’s educational goals, and an asset-allocation strategy with the potential to keep your RESP investment growing. That way, if your student plans to go on to graduate studies, medicine, MBA or law school, the RESP will continue to provide funds to cover expenses.

If post-secondary school starts soon, meet with your certified financial planner professional to optimize tax planning for your RESP withdrawals.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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