The words “back to school” conjure up memories for all of us, particularly when thinking about post-secondary school. While the uncertainties of these COVID-19 times may shape memories differently, there are, nonetheless, key wealth management considerations such students and their parents should be addressing.  

For instance, now’s the time to look more closely at making the best use of available Registered Education Savings Plan (RESP) funds, maximizing related tax efficiencies, and withdrawing from, or adding savings to a Tax-Free Savings Account (TFSA).

RESPs are a wonderful savings vehicle that allow grandparents and parents to accumulate funds for post-secondary education. However, they’re also terribly complex and fraught with pitfalls when it comes to making withdrawals.

Now that the RESP beneficiary is attending a post-secondary institution, it’s time to direct accumulated RESP funds towards tuition, textbooks, rent, phone bills, etc.  After all, the subscriber (a.k.a. the RESP owner) has discretion over how the funds are used. Here’s a brief look at how RESP withdrawals work. There are essentially two types:

1. Educational Assistance Payment (“EAP”) This withdrawal consists of Canadian Education Savings Grants (CESGs), investment gains and income monies held within the RESP.  EAP withdrawals are attributed to the beneficiary (fully taxable as 100% income), who is typically in a lower tax bracket than the subscriber.

It’s generally recommended that RESP subscribers make this type of withdrawal first. Why? EAPs can only be withdrawn penalty-free while a beneficiary is enrolled in a qualifying post-secondary program.  It’s important to keep that in mind.

Make EAP withdrawals early and often while the child is enrolled in college or university and split it over different calendar/tax years. Consider withdrawing an amount of EAP up to the Canada Revenue Agency’s personal exemption of $13,808 (assuming the RESP beneficiary does not have other taxable income) so the student doesn’t need to pay tax on those funds. 

2. Post-Secondary Education (PSE) This withdrawal is essentially a refund of the subscriber’s original contributions. 

There’s no limit on PSE withdrawals and no tax implication for subscribers or students. You don’t have to use PSE withdrawals solely for tuition. As long as you provide proof of enrolment in a qualifying program, you can spend this money on any cost associated with post-secondary education.

RESPs In Real Life

Many situations arise where parents chose not to make RESP withdrawals, or students misjudge expenses and busy parents decide to fund expenses rather than make EAP withdrawals from the RESP. Know this: If a student finishes school and a significant amount remains in the RESP (that cannot be utilized by another sibling in the same “family” plan), the parents will likely be taxed on the earnings portion of the funds remaining in the RESP and will be required to repay any CESG amounts included in the remaining contribution balances, plus additional withholding and penalty taxes. Note, there’s an option to roll over funds to an RRSP if contribution room is available.

Depending on a family’s financial situation, there may be a need to also withdraw savings from the parents’ TFSA to fund education expenses. However, where savings are more than adequate and/or the student has part-time employment income, there might be an opportunity to begin building a TFSA in the adult student’s name for future needs.

If you plan to withdraw funds from many of the available buckets and are uncertain of how much to take from each one to minimize taxes, be sure to speak with your tax or financial advisor.