RESP withdrawal rules: How recent changes provide a planning opportunity

The 2023 federal budget proposed earlier access to more Education Assistance Payments (EAPs) from Registered Education Savings Plans (RESPs). Assuming the budget passes and becomes law, students in the first 13 weeks of a post-secondary program will be allowed to receive EAPs up to $8,000 (currently $5,000) if they’re full-time and up to $4,000 (currently $2,000) if they’re part-time.

Why is this important? Any withdrawals above these limits come from original contributions to the RESP. Amounts contributed to an RESP can be tax-free withdrawn at any time. In contrast, EAPs can only be paid to qualifying beneficiaries and are taxable in the student’s hands. Because there are more strings attached to EAPs, it’s often a good idea to withdraw more EAPs early in a student’s post-secondary education – and that’s exactly what the new proposed rules allow.

Sources of money in RESPs

Imagine that Sophie, 18, is an only child who has just graduated from high school and been accepted into a Bachelor of Science program at a local university. She’s excited to get started on the path towards her dream career as a nanotechnologist, designing tiny devices she hopes will revolutionize medicine.

Sophie’s parents have been contributing to her RESP since she was born and, as far as she’s concerned, she has $70,000 in her RESP to put towards her university degree. But the government doesn’t think of that money as one big pot. It divides it into three categories, each with different rules:

• Original contributions
• Government grants and bonds
• Investment growth

RESP withdrawals – Tax considerations

When the beneficiary of an RESP enrolls in a qualifying education program, original contributions are the beneficiary's without restriction. They can withdraw as much as they want, whenever they want, and with no tax consequences.

The investment growth and government grants, however, come out of the RESP to pay for the beneficiary's education as Education Assistance Payments (EAPs). The amount that can be withdrawn as an EAP is limited during the first 13 weeks of the beneficiary's program, and taxable in the hands of the beneficiary attending school. After 13 weeks, the beneficiary can withdraw as much as they needs in EAPs provided they are still enrolled in a qualifying program.

If the beneficiary doesn’t use up all the available EAPs before they graduate, the investment growth can still be withdrawn as an Accumulated Income Payment (AIP), but it will be taxed in the subscriber's hands plus an additional 20% tax. There is one way this can be avoided: a subscriber is allowed to transfer up to $50,000 of AIPs to their RRSP with no immediate tax consequence, if they have RRSP contribution room available. Any unused grants left in the account must be returned to the federal government, with one potential exception.

If the beneficiary is part of a family RESP with more than one beneficiary, and if one child doesn’t withdraw his or her government grants, they may potentially be transferred to another beneficiary of the plan, provided the $7,200 CESG lifetime limit per beneficiary is not exceeded. Any excess amount remaining must be repaid to the federal government.

Note that, while the lifetime $7,200 CESG limit per child still applies, the lifetime $50,000 contribution limit does not apply in this case. That is, in a family plan with multiple beneficiaries, if one child doesn't attend postsecondary school, the original contributions made in that child's name can be allocated to the remaining beneficiary(ies) even if it results in more than $50,000 being contributed for a single beneficiary.

How to withdraw money from an RESP

The RESP subscribers have flexibility to designate the money taken out of the RESP either as EAPs or as withdrawn contributions. Often, it makes sense to withdraw EAPs first in order to avoid the punitive tax treatment of Accumulated Income Payments (AIPs). This is why the increased EAP limits in the proposed federal budget are significant: they allow students to receive significantly more as EAPs in those first 13 weeks. As a result, more contributions can remain inside the plan and wait to be withdrawn later – or, if not needed while the beneficiary is in school, by the subscribers tax-free.

How can money from an RESP be spent

There are no restrictions on how money withdrawn from an RESP, including EAPs, is spent. All that is required is that the beneficiary must be enrolled in a qualifying full-time or part-time educational program. Subscribers, who are often the parents or grandparents of the beneficiary attending school, can choose amounts of taxable EAPs that make sense. For example, it may be advantageous to withdraw less EAPs during years that include a co-op semester where the beneficiary has additional income.

It's essential to develop a personalized plan for your family’s RESP. The rules are complex, and there can also be additional considerations if students switch programs or take time off during their studies. With your advisor’s support, you can structure RESP withdrawals to include EAPs and contributions in the proportion that works best for your family – and make sure you’re taking full advantage of the increased limits for EAP withdrawals during the first 13 weeks of a full-time or part-time program.

Many people focus on the front end of RESPs – contributing and building savings through investment – but withdrawals on the back end are critical to manage as well. Your advisor can help you create an RESP strategy that encompasses both, guiding you as you accumulate funds for education and providing advice on how to withdraw from an RESP in the most tax-efficient manner possible when the time comes for your children or grandchildren to start realizing their educational dreams.