The preliminary proposition for the 2023 national budget introduces a provision for enhanced access to Education Assistance Payments (EAPs) from Registered Education Savings Plans (RESPs). If the budget is successfully passed and enshrined in law, students enrolled in a post-secondary program during the initial 13 weeks will have the opportunity to receive EAPs of up to $8,000 (currently $5,000) for full-time students, and up to $4,000 (currently $2,000) for part-time students.
The significance of this proposal lies in the fact that any withdrawals exceeding these limits will be sourced from the contributions made by parents and grandparents to the RESP. Such withdrawals can be made at any time without incurring taxes. Conversely, EAPs can only be disbursed to eligible beneficiaries and are subject to taxation in the hands of the student. Due to the additional constraints associated with EAPs, it is often prudent to withdraw a greater amount of EAPs early in a student’s post-secondary education, and this is precisely what the newly proposed regulations allow.
Origins of funds in RESPs
Consider the case of Sophie, an 18-year-old single child who has recently completed high school and gained admission to a Bachelor of Science program at a local university. She is enthusiastic about embarking on the journey towards her desired occupation as a nanotechnologist, with aspirations of revolutionizing medicine through the design of miniature devices.
Sophie’s parents have been contributing to her RESP since her birth, and she believes that she has accumulated $50,000 in RESP savings to finance her university degree. However, the government does not regard this money as a single unified pool. Instead, it categorizes it into two distinct groups, each governed by different regulations:
1. Original contributions
2. Investment growth and government grants (Canada Education Savings Grants and Canada Learning Bonds)
Tax considerations for RESP withdrawals
The original contributions belong entirely to the beneficiary and can be withdrawn freely, without any tax consequences, up to any desired amount and at any time.
On the other hand, the investment growth and government grants are utilized from the RESP to cover the beneficiary’s educational expenses through EAPs. During the initial 13 weeks of the beneficiary’s program, there are limitations on this amount, and it is taxable in the hands of the student. After this initial period, the beneficiary can withdraw EAPs as required, as long as they remain enrolled in a qualifying program.
If the beneficiary does not exhaust all the available EAPs before graduating and entering the workforce, the investment growth can still be withdrawn as an Accumulated Income Payment (AIP). However, this withdrawal will be subject to taxation in the hands of the subscriber, with an additional 20% tax. There is a way to avoid this scenario: subscribers can transfer up to $50,000 in AIPs to their Registered Retirement Savings Plans (RRSPs) if they have sufficient contribution room available. Regardless, all remaining government grants in the account must be returned to the federal government.
In the case of a family RESP with multiple beneficiaries, EAPs can continue as long as at least one of the beneficiaries remains eligible, and the plan is less than 35 years old. However, while each child in a family plan may have received government grants, there is a maximum amount per child that can be disbursed. Therefore, if one child does not withdraw their government grants, they must be repaid to the federal government and cannot be transferred to another child.
Withdrawal process for an RESP
RESP subscribers possess the flexibility to designate the withdrawn funds as either EAPs or contributions. It often makes sense to withdraw EAPs first, as they are subject to more stringent regulations. This is why the increased EAP limits proposed in the federal budget hold significance: they enable students to receive significantly higher amounts as EAPs during the initial 13 weeks. Consequently, a greater portion of the contributions can remain within the plan and be withdrawn at a later time. Alternatively, if the funds are not required while the beneficiary is in school, they can be withdrawn tax-free by the subscribers.
Utilization of funds from an RESP
There are no restrictions on how the funds withdrawn from an RESP, including EAPs, can be spent. The only requirement is that the beneficiary must be enrolled in a qualifying full-time or part-time program. Hence, parents can select taxable EAP amounts that align with Sophie’s income during her educational journey, such as withdrawing a lesser amount during years that include income-generating co-op semesters. This approach allows for flexibility and aligns with the family’s overall financial plan.
Developing a personalized RESP plan is essential for every family. The regulations can be intricate, especially when students switch programs or take breaks during their studies. With the guidance of an advisor, you can structure RESP withdrawals, including EAPs and contributions, in a manner that best suits your family’s needs. Additionally, you can ensure that you fully capitalize on the increased EAP limits during the initial 13 weeks of a full-time or part-time program while maintaining tax efficiency.
While many individuals primarily focus on the initial stages of RESPs, such as contributions and savings through investments, it is crucial to effectively manage the latter stages as well. An advisor can assist you in formulating an education savings strategy that encompasses both aspects, enabling you to accumulate funds for education and providing guidance on the most tax-efficient approach to withdrawing from an RESP when your children or grandchildren are ready to pursue their educational aspirations.