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Withdrawing your child's RESP: Six important questions from parents

Posted on Thursday June 13, 2019

Withdrawing your child's RESP: Six important questions from parents

Has your child just finished grade 12 and is preparing to start post-secondary studies? In this article, we answer parents' most frequently asked questions on withdrawing their children's RESP (Registered Education Savings Plan) once they reach this stage of their lives.

1. What part of the RESP really belongs to my child?

The content of an RESP is divided into two parts. The first, called invested capital, is made up of the contributions made by the subscriber(s) (parents or grand-parents, for example) for the child (the beneficiary) throughout his or her childhood and adolescence. This portion belongs to the subscriber, who can choose to take it back or give it—entirely or in part—to the beneficiary, as a gift, without penalty. The other part consists of government grants and interest accumulated on the amounts invested. This is called education assistance payments (EAP), and it belongs entirely to the student.

2. My child just completed grade 12. How do I withdraw funds from the RESP?

The funds in an RESP are managed by the RESP promoter—generally a Canadian financial institution such as UNI, or a recognized private promoter, such as Universitas or C.S.T. Regardless of the institution or promoter, you will need to provide official proof of the child’s enrollment in a post-secondary study program before the funds are paid. Some promoters may require other documents, such as receipts for the purchase of school supplies or other proof that the funds are being used to cover eligible study-related expenses. According to Canadian law:

“If the beneficiary is enrolled in full-time post-secondary studies, Educational Assistance Payments are limited to $5,000 during the first 13 consecutive weeks of enrollment. After that, you may request any available amount with no limit unless the student takes a break from his or her studies and does not re-enroll in a qualifying educational program for 12 months. If that happens, the original limit is reinstated. If the beneficiary is enrolled in part-time studies, Educational Assistance Payments are limited to $2,500 for every 13-week period of enrollment.”

The Income Tax Act (Canada) sets an annual limit on the withdrawals made. The ceiling, which was $23,460 in 2018, is indexed each year.

3. When can RESP funds be withdrawn?

The RESP is a financial tool designed to finance post-secondary studies. Therefore, it should not be withdrawn before the beneficiary’s enrollment in a recognized institution. Any withdrawal done prior to enrollment cancels any government grants; it is therefore very costly financially. It could be advantageous not to withdraw the entire amount at once, especially if your child plans on a long study program, or if they are still unsure what career path they wish to pursue.

4. Are the amounts withdrawn taxable?

The amounts that make up the invested capital are not taxable because they belong to the subscriber. However, the amounts corresponding to the EAP are taxable and must be declared as income on the student’s tax return. Note: The amounts paid to the beneficiary that come from the invested capital are not taxable.

5. Shared custody: who is responsible for the RESP?

Management of the RESP is generally negotiated during the separation, along with all other issues regarding the children. If a judge or mediator has named one of the two parents responsible or has set the terms of withdrawal, these decisions must obviously be respected. If the issue was left unresolved, you must inform your ex-spouse of your intentions regarding the RESP and obtain his or her consent on the withdrawal amounts and frequency. Being transparent and making decisions together will prevent any potential conflicts.

6. If my child decides not to do post-secondary studies, can the funds be transferred?

If you have contributed to an individual plan, you will have the option of naming another beneficiary. However, certain terms may apply. It is therefore crucial that you contact your institution or promoter. If you have contributed to a family plan, you can use the income, as well as certain federal and provincial grants, to finance your other children's studies. It is important that you consult the terms of your plan to transfer it without penalty to another future student. Should you decide that you do not want to transfer the funds to another person, you can take back the invested capital, but you will lose the government grants.

Withdrawals can be spread over the entire study period, as the RESP has a lifespan of 35 years following the date it was opened. So there’s no rush! It is often wiser to plan carefully over time than to withdraw in a hurry.

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