Time to pay the post-secondary piper
Around about this time of year, the great Canadian university hunt gets into full swing. Universities make the rounds at high schools and fairs, looking to entice students to their schools. Students and parents make the rounds, check the programs, visit the universities, and make their applications. In the fall, the kids go off to college. And the tuition bills come in. That’s when it’s time to start making withdrawals from Registered Education Savings Plans (if you had the foresight to set them up, say, 15 years ago!) The rules for RESP withdrawals are fairly simple, but there are a few wrinkles to be aware of.
Students can begin receiving payments (called Educational Assistance Payments, or EAPs) towards tuition from the RESP as soon as they are enrolled in a qualified post-secondary educational program, including colleges and universities, apprenticeship programs offered by trade schools, and CEGEP in Quebec. For Canadian residents, the payments consist of funds contributed to the RESP and earnings on those funds, the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB) for eligible students, and any provincial savings programs the student may be eligible for.
Because the EAPs are considered income for the student, the student will have to file a tax return reporting that income. However, because the student is likely in the lowest tax bracket, and because various other deductions (including tuition, education, and textbook amounts, interest on student loans, and moving expenses among others) will reduce that income considerably, there will very probably be no tax to pay on RESP withdrawals at all.
If the student has applied to and been accepted at a foreign university, there are some wrinkles to the RESP withdrawal rules. A university or college outside Canada qualifies as a post-secondary institution eligible for EAPs, provided the student has been enrolled full-time in a course of not less than three consecutive weeks and remains a resident of Canada.
The rules for eligibility for the Registered Education Savings Plans are pretty clear. According to the Canada Revenue Agency, “…you can designate an individual as a beneficiary under the RESP only if the individual’s social insurance number (SIN) is given to the promoter before the designation is made; and the individual is a resident of Canada when the designation is made.”
Residency status is a bit trickier. Even if you are a Canadian citizen, Canada Revenue Agency rules state that you are a non-resident for tax purposes if you:
- Normally, customarily, or routinely live in another country and are not considered a resident of Canada; or
- Do not have significant residential ties in Canada; and you live outside Canada throughout the tax year; or you stay in Canada for less than 183 days in the tax year.
In the case of grandparents looking to set up RESPs for grandkids living in the U.S., it appears they’re out of luck. To qualify for RESP benefits, the grandchildren would have to be residents of Canada at the time the RESP is set up, and they would need to have Canadian Social Insurance Numbers. They would also have to be residents of Canada to qualify for the CESG and be eligible for other grants and incentives. And they would have to remain residents of Canada to receive the full EAPs for attending a post-secondary school outside Canada.
Check with the sponsor of your RESP for your withdrawal options well in advance of heading off to school in the fall. Or consult with your financial advisor if they’ve helped you set up your plan.