This post is part of the Big RESP Series. See the entire series here.
See the previous post on additional grants.
These rules are valid as of 2010.
When the child is ready to go to school the subscriber needs to start withdrawing money from the RESP account. To withdraw money you have to provide some proof to your resp provider that the resp beneficiary (child) is going to an approved post-secondary school. You don’t have to show receipts for specific purchases.
In your RESP account there are two different types of money: contributions and accumulated income. The contribution amount is the sum of all the contributions that you made to the account over the years. The accumulated income is made up of grants, capital gains, interest, dividends earned in the account. In other words any money that is not a contribution is considered to be accumulated income. In my example of an resp account (which we’ll see in a future post), the final value of the account when the child started school was $87,556 of which $32,400 was contributions and $55,156 is accumulated income.
This distinction is important because the taxation of contribution withdrawals is different than accumulated income. Contribution withdrawals are not taxed since that money was already taxed when the subscriber first earned it. AIP (accumulated income payments) are taxed as income at the hands of the student.
The good news is that students have the personal exemption as well as tuition tax credits which helps lower their tax bill. Obviously income earned during summer jobs or on co-op work terms will affect their taxes as well. Another bit of good news is that you can tell your financial institution if you are with drawing contribution or AIP (or both) so you can manage the taxes to some degree.
First – one withdrawal rule to get out of the way – you are only allowed to withdraw $5,000 of accumulated income in the first 13 weeks. I believe this is designed so that a child who doesn’t want to go to post-secondary education won’t just sign up and attend one term in order to withdraw all the money in the RESP instead of the subscriber collapsing it properly.
When planning the withdrawals try to withdraw as much accumulated income money as you can tax free. For example when the student first starts school, they will have just completed a short summer (two months) so they probably won’t have much income for the year. For the first year you should probably take the maximum AIP allowed in the first term of $5000 since it probably won’t be taxed at all. If the student is in a co-op program and has two work terms in one year and only one school term then that might be a good year to take out contributions rather than accumulated income.
A little tip – you might end up with too much money in the resp especially if the child ends up going to school for shorter than expected. Just take out all the money when you can – if you leave it in the plan then you will have to collapse it and pay extra taxes on it.
What happens if Junior decides that school is not for him? You have to collapse the plan and pay a pile of tax on it. First of all you have lots of time to collapse the plan so don’t do it right away. It’s always possible that your child will give up on their pro hockey or musician career and will need the money for schooling later on.
If you do collapse the plan then the contributions are tax free, anything else (accumulated income) is added to the subscriber’s gross income for taxation purposes. And on top of that, the accumulated income is charged a tax of 20%.
Needless to say, if you are retired or have any way to reduce your income in the year you collapse a resp plan, then do it to save taxes.
See the next post on RESP Asset Allocations
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My daughter is turning 18 next January, 2010. She is starting college this fall away from home. I am still contributing to her RESP. This year it is $2,500 plus a carry over from a previous year where I did not contribute of $2,000. So that’s a total contribution of $4,500 for this year 2009. My question is, can I withdraw $5,000 this fall when she starts college even though I contributed for her this year? We have a family plan. My son is still in high school and right now we are contributing $2,500 a year for him.
Monica – you should verify with your resp provider but I don’t see any problem with making contributions and withdrawing in the same year.
I graduated with a 4 year degree in Spring 2008. As a result of a part-time job and RESP withdrawals given to me by my parents, I ended up owing the tax man $4,000 in taxes for 2007-2008 (CDN). I am terrified to know how much I might be owing this time – for the last semester of my education. My question is, are there any ways to cushion how much I’ll end up owing as a result of over-zealous RESP withdrawals?? How much of it can I claim back, if any? (for example, text books, rent, etc)
No one told me I’d end up being taxed!!
Frustrated – cheer up! It’s a lot better to be making more money and paying taxes than to making less money and less taxes.
I’m not too recent on student deductions – you should check with a tax preparer or go through the form yourself. I assume that tuition is still deductible but I don’t know about text books. I think rent can be claimed as well even if you aren’t a student.
One other point – make sure you are only claiming income on the non-contribution portion of the RESP withdrawals – the original contributions can be withdrawn and they aren’t taxable income.
You should try to do your own taxes – it’s a good way to learn more about your finances which is pretty important now that you have completed school.
thank you, four pillars! You make several valid points. It sounds like I over-paid the last go around, as I’m pretty sure the ENTIRE resp withdrawal was claimed as my “income”, as opposed to just the non-contribtution portion.
As soon as I have all my paperwork in order I’m rushing into H&R block — to learn how to do my own taxes, and to take my independence back!
In one of the above comments, you mention that part time is defined as a minimum of 12 hours of classes per month. Does this include short safety ticket courses (ie. H2S, First Aid, TDG etc.)? Also, with part time studies, can you still withdraw the full $5,000 in the first 13 weeks?
Hi Joan – I’m not 100% sure about the actual courses that are eligible for RESP. I have my doubts that safety courses would qualify but you should check with the CRA since I really don’t know.
With part time you can only withdraw $2500 in the first 13 weeks.
http://www.hrsdc.gc.ca/eng/learning/education_savings/promoter/infocapsules/ICE17.pdf
Keep in mind that the $2500 limit only applies to EAP money (earnings from grants, capital gains etc) in the resp account. Any contributions can be withdrawn anytime.
Hi;
I’m a US taxpayer (and a dual citizen – born and raised in Canada for 40 years.) I started an RESP in 1989 and wish to withdraw the balance. (no need — gkids now working and don’t need.) I’m told as a US cit. I can’t withdraw the AIP. Is this correct? and is there some exception that will allow me to withdraw? I am not objecting to the tax and penalty on the AIP (as if I was a Can. taxpayer) but I don’t want to get a T4 on the AIP which will excite CRA into thinking I’m a Can taxpayer. I’d settle for a NR4. Can you offer any advice? Thanks.
Hi:
I have maximized the contribution of $50000 per child for my two sons, as RESP is a tax shelter or tax deferred tool for investment. How can I only withdraw AIP amounts first without touching contribution $? And making all left over money was contribution $ and can be withdrew later on by parents without paying tax.
Thank!
June – you can direct your resp provider to withdraw either AIP money or contributions.
Hi:
My daughter’s relatives have a $20,000 RESP and she will be attending university in the fall. I’m familiar with the $5,000 restriction in the first semester. However, can the contributors restrict the amount of money going to her from the RESP? Can they ask the provider to allocate only $2,000 per year to her on the hope that they will recoup some of the losses from the recent stock market collapse?
I wasn’t familiar with this rule and it seems a bit strange.
Thanks!
concerned, yes you can ask that only $2000 be withdrawn by filling in that amount on the withdrawal request. There is no obligation to use any of the funds when a student is in post-secondary studies.
Furthermore, if tax is an issue, once the student is enrolled in a qualifying program like a university, the $2000 could be split between withdrawal of contributions, which are totally tax-free and an Education Assistance Payment (EAP) which is taxed in the hands of the student. If there are losses in the RESP, whereby the current market value of the RESP investments is less than the sum of the contributions and the government education grants (CESG), then the EAP will consist only of CESG money, which is good because using it for education is necessary. If grant money is not used for education it must be returned to the government. It cannot be taken out as AIP, for example.
The RESP provider is obliged to keep track of all amounts – contributions, grants and earnings – so you can ask what the balance is of each one at any time.
btw, AIP is never received by the student. AIP is what happens when the earnings cannot be used by a student. AIP goes only to a subscriber. AIP cannot be withdrawn at any time. There are restrictions, like the fact that the RESP must have existed for ten years before an AIP can be made (which may be why the mutual fund company Doug talked about in an earlier comment refused to allow earnings to be withdrawn) see http://www.hrsdc.gc.ca/eng/learning/education_savings/publications_resources/promoter/tools/guide/033.shtml#a
Is there a way I can withdraw money from my resp for non educational purposes? I thought you could but with a huge tax to pay..?
Thanks
I have a question, Can the contributor withdraw all RESP amount in the account without the student consent? Since thats what happened to my friend, she wanted to use the money in her RESP to pay for her (university) school tutions and books but when she access the account the account is emptied by her mom.
Hi Wilson – an RESP account is under the full control of the subscriber (person who opened the account) at all times. So, yes your friends mom is entitled to do whatever she wants with the resp including spending it on herself.
Hi, I was wondering what is meant exactly by ‘approved post-secondary school’. I might go back to EU in the next 10 years, so i wasn’t sure what’s needed as proof of education to be able to withdraw including the grant money. I talked to a childrens education fund sales person and he mentioned that it could be and post-secondary school/university, even outside of canada, all that’s needed is a not from the institution that proves that the kid is enrolled.
Is this true?
Hi Randy, if your child ends up going to school outside of Canada then they can still use the money from an RESP. However they can’t receive any grants if they are not living in Canada.
I would strongly suggest that you don’t buy an resp from a sales person – they are not a good deal. Just set one up at your bank.
Thanks a lot, Mike! Just so i get this right, the gov will take back the grants (matched contributions made by the gov) if the kid studies outside of Canada?
Also, I’m looking into setting up a TD mutual fund RESP account that i’ll then convert into a TD e-series funds account as is described in another blog entry in this series (http://www.four-pillars.ca/2007/11/23/resp-how-to-get-started/). Hopefully there’ll be no annual fee. this sounds a bit complicated though, is it to avoid the annual fees?
Most banks have a 50$ annual fee for RESP accounts. For example the TD Waterhouse RESP account (their other RESP product) has a 50$ annual fee if you have below $25K in the account.
I had a quick question. I have an RESP for my daughter(she is only 4) and I wanted to take some funds from the account. If this possible? if it is What is the tax implication? Is there a limit as to what I can take? How fast would the money be avaiable?
Thanks
Priscilla – you should check with your resp provider but I would suggest not taking the money out.
You are going to have some tax implications – you are allowed to take out contributions without penalty but I think that is only true if the child has started school.
In your case I suspect that any contributions you remove will mean losing the grant associated with it and you’ll have to pay tax on any earnings. Depending on the provider they might not support a partial withdrawal.
Short answer is yes there will be problems and you need to contact the financial institution where you have the account. Needless to say you should try to get the money from elsewhere.
Our child has a (roughly) $25K RESP and will begin attending post-secondary in September.
From what I’ve read, we don’t have to provide receipts for expenses, we just have to provide proof of enrolment to begin removing funds from the RESP.
Now my questions…
1) After the first $5K is withdrawn at the beginning of September, are there any limits to the amount that can be removed on a yearly basis? (I *think* there isn’t, and the only ‘limit’ would be choosing to keep the withdrawals below the threshold where income tax would have to be paid.)
2) The reason we’re asking (1) is it *seems* like it would be a good idea to take out any *extra* cash and divert it into a TFSA (Tax Free Savings Account). Do you know if there are any problems with doing that?
Thanks very much.
I am in a situation whereby the value of the RESP A/C is less than the Contribution + CSEG. In other words, I have lost due to bad investments. I am assuming the only part that will be taxed in the student’s hand is the CSEG. Please confirm. Thanks
RH, as far as I know you can take your original contribution amount out tax free. If that amount is more than the account value then no taxes will have to be paid.
If the account value is higher than the contribution amount then only the part in excess of the contribution amount will be taxable (for the student).
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