Withdrawing from RESPs

You’ve been diligently saving in your children’s (grandchildren’s, nieces’, nephews’, neighbour kids’) RESP accounts for years. You’ve maximized your contributions, you’ve collected those fabulous CESGs, provincial grants, Canada Learning Bonds, and deliciously deferred a bunch of tax. Nice work, parental units! (If you’re still contributing and want to check on how much more room you have, we’ve created a handy RESP contribution worksheet you can download here).

Now that you’ve escorted these children through years of homework and sports events, helped them study for those exams, gathered every application for universities and scholarships you can find, and even dropped an unreasonable amount of money on all those graduation events (WHY? Why are there so many?), you’re looking at putting all that lovely money to work.

But wait! How do you get that money out, now that tuition, textbook, and accommodation invoices have started to roll in?

It should be easy, right?

But why make things easy when, instead, you can simply increase the sheer number of forms you fill out and acronyms you can learn. Fun with finance!

Definitions

Since you’ve passed Grade 12 English, we know you’re pumped to learn a new language, especially one that you’ll only ever need when one of your children is attending post-secondary school. That sounds sensible.

Contribution Amount: This refers to the sum of all contributions made to your RESP over the years. It doesn’t matter if the investment value has increased or decreased – the contribution amount remains the same.

Non-Contribution Amount: This is all the other stuff that ends up in the account. Government grants, capital gains, interest, dividends – any money that isn’t a contribution of your (or your family’s) hard-earned cash.

Post Secondary Education Payments (PSE): You knew there would be acronyms! This is a type of withdrawal from your RESP. The PSE is the portion of the payment that is taken from the Contribution Amount. Because this is your hard-earned, tax-paid money, there’s no tax on this amount.

Educational Assistance Payments (EAP): This is from the Non-Contribution Amount. This portion of the withdrawal is from all those other things. This amount is taxable, on the student’s tax return. Given that they probably don’t make much money, the tax payable should be pretty low. There aren’t any withholding taxes so, if your student does make some money in that tax year, we recommend setting aside a portion to pay that inevitable bill.

Qualifying Educational Program: Your student can attend full time or part time post-secondary school, and the program can be in Canada or even outside of Canada. In any case, the program must “qualify” under the rules. Rather than giving you that rather long list in this article, here’s a link to the qualification rules.

Withdrawal Limitations

So. Many. Rules.

Prove It!
You need to provide proof of enrollment before you get to take out any money. Yeah, it’s annoying. There are reasons to be nice to your RESP provider though, down there in the “Are You Special?” section. Your financial institution will have a breakdown of the proof they need and in what format. It might be just the enrollment letter from the post-secondary school, a specific form that the registrar’s office needs to complete, or if they’re really persnickety, they may be looking for receipts for purchases made. Your RESP provider is responsible for determining what is a “reasonable expense” in accordance with the Income Tax Act, so if they’re being a pain it’s because they don’t want to get in trouble.

Find out what you need to gather to get your money out as early as possible. Like… now.

PSE Withdrawals
You can withdraw as much of the PSE – the non-taxable kind of money – as you want once your student is attending post-secondary school.

EAP Withdrawals
In the first 13 weeks of the first year of school¹, your student can withdraw a maximum of $5,000 of EAP for full -time studies or $2,500 for part-time studies (taxable money). After those 13 weeks, your student can withdraw without limitation. Since school often starts in September, what you’ll find is that 13-week period pretty much takes you through to the winter holidays. Expect your student to show up hungry.

Neither $2,500 nor $5,000 is a lot when it comes to paying taxes. If that’s all the money your student can expect to have on their tax return, they probably won’t be paying any tax. Make sure that you’re talking to your tax professional before you decide not to set aside money for taxes though – you don’t want any surprises.

Note that if your student is not enrolled for a 12 month period after taking that first EAP withdrawal, that 13 week maximum will come up again when they restart their education.

Grant Withdrawals
Many Canadians have Family RESP plans, where all the money for a group of siblings is in one account. Remember that while CESG money can be shared between beneficiaries, you’re only allowed to share up to the $7,200 lifetime limit per beneficiary. Make sure you’re not drawing out more than $7,200 of grant money per child – or the government will want their money back. You know they’ll be paying attention.

Ask your financial institution to provide you with accounting for exactly how much grant money in total has been withdrawn per beneficiary every time a new withdrawal is made. Don’t expect them to do this without you asking. If you want to play along at home, we’ve created a simple RESP withdrawal tracking sheet that you can download here.

Did You Know?
Your student is eligible to receive payments from their RESP for up to six months after the end of their enrollment in a qualifying program (provided your RESP provider says that’s okay – we hope you picked a good one). Of course, the related expense still has to be on the “qualified” list.

Are you special?
You could be. If you need to withdraw more money than allowed, make friends with your RESP provider. They could potentially submit a request to the Minister of Employment and Social Development to approve a larger withdrawal. If approved, your provider has to complete a request form and then send it in. Buy them a coffee.

My Kids Don’t Need the RESP. Now What?

Don’t panic, and don’t let the thought of your kids dropping out and moving to the woods instead of pursuing a formal post-secondary education stop you from contributing to an RESP.

You have 35 years from the year the plan was opened before it has to be collapsed or transferred to a sibling’s RESP, provided there’s contribution room available and the sibling is under 21 (or it’s a family RESP to begin with).

Remember, the money you contributed is always your money. You can withdraw every last cent, tax free. Any grants or bonds that those contributions attracted are returned to the government, which leaves only the investment income earned to be dealt with.

If you or your joint subscriber have contribution room, you can transfer up to $50,000 of the accumulated income to your RRSP, and pay tax on it later along with the rest of your RRSP withdrawals.

In the worst-case scenario, your erstwhile student never goes back to a qualifying program long enough for you to withdraw everything in one fell swoop, doesn’t have any siblings eligible for a transfer, and you don’t have any RRSP contribution room available by the time the plan hits the 35-year wind-up deadline. You’ll pay tax on the investment income (but only the investment income) at your marginal rate for the year, plus you’ll pay an additional 20% tax as a penalty.

If you suspect this last scenario may happen to you because it’s just your luck, keep the wind-up deadline in mind and start thinking seriously about how to avoid that 20% penalty while you still have enough time to do anything about it.

¹ Why thirteen? For Reasons. Good Reasons. Secret Reasons.