How RESPs pay out for post-secondary expenses
If you have kids going off to college or university this fall, you’ll be tapping into any savings you’ve made through a Registered Education Savings Plan (RESP). But those payments aren’t treated like a bank account. There are plenty of rules about how they’re administered.
Educational Assistance Payments
To start receiving funds from and RESP (these are called Educational Assistance Payments, or EAPs), the student must be enrolled in a qualifying educational program (three consecutive weeks and 10 hours per week), including post-secondary institutions or distance education courses provided by them. In addition, a student is eligible to receive EAPs if they are age 16 and have enrolled in a specified educational program (three consecutive weeks and 12 hours per week).
- A post-secondary institution is defined as
- A university or college in Canada.
- An ESDC-certified educational institution in Canada offering non-credit courses for occupational improvement skills.
- A university or college outside Canada offering post-secondary courses at which the student was enrolled full-time for at least three consecutive weeks.
- A university or college outside Canada at which the student was enrolled for at least 13 consecutive weeks.
For studies in a qualifying educational program, there’s a $5,000 maximum EAP ($2,500 for specified educational programs) that can be made to a student for the first 13 consecutive weeks. After that, there’s no limit on EAPs that can be made, provided the student continues to qualify to receive them. If the student drops out for 12 months, the $5,000 maximum applies again.
In some cases, the sponsoring company may also pay a portion of the RESP contributions to the student tax-free in addition to the EAP. But this depends on the terms of the RESP. Check with your RESP administrator.
Typically, EAP payments flow from the Canada Education Savings Grant, the Canada Learning Bond, amounts from provincial programs, and earnings on contributions in the RESP. The RESP sponsor reports EAPs for tax purposes on a T4A slip that is sent to the student, who in turn reports the EAPs on their tax return as income for the year they receive them. Presumably, the student will be in a low tax bracket and therefore pay little or no tax on the EAPs.
What if the student has other ideas?
If the student who is the beneficiary of the plan decides not to attend a post-secondary school, the investment income earned in the RESP is paid to one subscriber (typically a student’s parent) in the form of Accumulated Income Payments (AIPs). To be eligible for AIP payments, the RESP must be at least 10 years old, and the student beneficiary must be at least 21 and not eligible to receive EAPs.
AIP payments are taxable to the subscriber who receives them and are reported by the plan sponsor on a T4A slip. AIP amounts must be included in income for the year in which they are received. In addition to being taxed at the recipient’s marginal tax rate, AIP payments are also subject to a further 20% federal tax (12% in Quebec). The tax hit can be reduced if you roll over the AIP payments to an RRSP or certain other registered pension plans, provided you stay within your contribution limit, not exceeding a lifetime maximum of $50,000 in AIPs.
Plan sponsors typically have information and withdrawal forms right on their websites. But it can get complicated if the student decides not to attend university or college, or takes a year off before re-enrolling. Find more information about RESPs at Canada Revenue Agency or Service Canada. Of course, your financial advisor can also help you understand the nuances of various payout options for RESPs.
© 2017 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.