care with RESP withdrawals
A registered education savings plan (RESP) lets you save
for your child's post-secondary education.
You can contribute a maximum of $4,000 annually to an RESP.
Of this amount, $2,000 will receive a Canada Education Savings
Grant (CESG) from the Federal government, equal to 20 per
cent of what you put in. The grant is for a maximum of $400
per year, to a lifetime total of $7,200.
When it comes time to take money out of an RESP for your
child's post-secondary education, you'll need to first determine
how the funds in the plan break down into the two main components.
The financial institution holding your plan can help you with
A large part of the plan will consist of your contributions.
You can withdraw these without tax implications. In fact,
you can withdraw your contributions at any time during the
life of the plan without paying tax. That's because RESP contributions
aren't tax-deductible like RRSP contributions.
However, if the contributions are not used for a child's
education, the subscriber must pay back the grants received
from the government on those contributions.
The rest of the funds in the plan consist of educational
assistance payments. These are made up of the grants received
during the life of the plan, plus the plan's accumulated earnings
from interest, dividends and capital gains. Note that all
withdrawals of grants and investment income are taxed in the
student's hands like ordinary income, without the benefit
of the dividend tax credit or the 50 per cent exclusion of
When the student withdraws the plan's earnings and grants,
they are taxable to the student, not the contributor. However,
students usually have little income and pay little or no tax.
The student can use the educational assistance payments or
contributions once he or she becomes a full-time student at
a qualified post-secondary institution (the funds cannot be
used for part-time studies).
The student can use the funds for educational expenses such
as tuition fees or books, as well as for living and transportation
expenses. Students can withdraw a maximum of $5,000 in their
first 13 weeks of full-time study. (Note - that the $5,000
limit applies only to the educational assistance payments,
not to the subscriber's original contributions).
After 13 weeks, the student can withdraw as much as needed
to cover qualified educational spending.
Finally, you must decide whether to let the student use
the contributions to the plan or the income accumulated in
the plan to meet expenses.
We think you should take out as much of the educational
assistance payments as possible each year, subject to the
student not having to pay any taxes. That's because the student
may get a well-paying summer job in later school years and
hence be in a higher tax bracket.