How Are RESP Withdrawals Taxed in Canada?

A Registered Education Savings Plan (RESP) is a specialized savings vehicle designed to help individuals save for a beneficiary’s post-secondary education. Contributions grow tax-deferred, providing a strategic advantage for educational funding. Understanding the tax implications of withdrawing funds from an RESP is important for both the subscriber, who contributes, and the beneficiary, who uses the funds.

Understanding RESP Withdrawal Components

An RESP comprises distinct financial components, each treated differently for tax purposes upon withdrawal. The primary components include contributions made by the subscriber and accumulated income earned within the plan. Accumulated income encompasses investment earnings, such as interest, dividends, and capital gains, along with government grants like the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).

When funds are withdrawn from an RESP, they fall into three main categories. Educational Assistance Payments (EAPs) consist of the accumulated income and government grants, paid directly to the student beneficiary to cover educational expenses. Post-Secondary Education (PSE) Capital Withdrawals represent the return of the original contributions made by the subscriber, which can be paid to either the subscriber or the beneficiary. Finally, Accumulated Income Payments (AIPs) are payments of the accumulated income (and sometimes grants if not paid as EAPs) made to the subscriber when the beneficiary does not pursue post-secondary education.

Taxation of Educational Assistance Payments (EAPs)

Educational Assistance Payments (EAPs) are taxable income for the student beneficiary. These payments are composed of the investment earnings accumulated within the RESP and any government grants, such as the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB). EAPs are taxed at the student’s typically lower income tax bracket, often resulting in minimal or no tax payable due to available tuition and education tax credits.

To qualify for EAPs, the student beneficiary must be enrolled in a qualifying post-secondary educational program at an eligible institution. Proof of enrollment is required by the RESP provider. There are specific limits on initial EAP withdrawals: for full-time studies, a maximum of $8,000 can be withdrawn in the first 13 weeks of enrollment, while part-time students are limited to $4,000 during the initial 13-week period.

After the initial 13 consecutive weeks of study, these withdrawal limits typically no longer apply, provided the student continues to be enrolled in a qualifying program. If a student ceases enrollment for 12 consecutive months and then re-enrolls, the initial 13-week limits may reapply. The Canada Revenue Agency (CRA) sets an annual threshold for EAPs as a guideline, and withdrawals should generally align with educational needs.

Both the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB) are included in EAPs and become taxable to the student upon withdrawal.

Taxation of Post-Secondary Education Capital Withdrawals

Post-Secondary Education (PSE) Capital Withdrawals represent the return of the original contributions made by the subscriber to the RESP. These withdrawals are not considered taxable income for either the subscriber or the beneficiary. This is because the contributions were made using after-tax dollars, meaning taxes were already paid on the money before it was put into the RESP.

These non-taxable withdrawals can be made by the subscriber at any time, or they can be directed to the beneficiary once they are enrolled in a qualifying post-secondary program. Taking a PSE Capital Withdrawal does not reduce the accumulated income or government grant portions remaining within the RESP. Therefore, these withdrawals offer a flexible and tax-free way to access the principal amounts invested in the plan.

Taxation of Accumulated Income Payments (AIPs)

Accumulated Income Payments (AIPs) occur when the accumulated income and grants within an RESP are withdrawn because the beneficiary will not pursue post-secondary education. These payments are typically made to the subscriber of the RESP and are subject to taxation. AIPs are considered taxable income and must be included on the subscriber’s tax return in the year they are received.

Beyond the regular income tax, AIPs are subject to an additional tax of 20% federally, or 12% for residents of Quebec. This additional tax is intended to penalize the non-educational use of the tax-sheltered growth and grant money. Furthermore, any government grants, such as the CESG or CLB, that are part of the accumulated income portion must be repaid to the government when an AIP is made.

Circumstances under which an AIP can be made include situations where no eligible beneficiary is pursuing post-secondary education, all beneficiaries have reached a certain age (e.g., typically 21), and the plan has been in existence for a specified period (e.g., at least 10 years). Subscribers may be able to avoid the additional tax and defer the regular income tax on AIPs by transferring the funds directly to their Registered Retirement Savings Plan (RRSP) or a spousal RRSP. This transfer is permissible if the subscriber has sufficient unused RRSP contribution room, with a lifetime maximum transfer of $50,000 per subscriber.

Reporting RESP Withdrawals for Tax Purposes

When RESP withdrawals are made, the RESP provider is responsible for issuing a T4A slip, Statement of Pension, Retirement, Annuity, and Other Income, for any taxable amounts. Educational Assistance Payments (EAPs) are reported in Box 42 of the T4A slip and are claimed as income by the student beneficiary on their personal income tax return, specifically on a line such as line 13000 of the T1 General form.

Accumulated Income Payments (AIPs) are reported in Box 40 of the T4A slip. The subscriber receiving the AIP must include this amount as income on their tax return, typically on line 13000 of the T1 General form. Additionally, the subscriber is required to calculate and report the additional tax on the AIP by completing Form T1172, Additional Tax on Accumulated Income Payments from RESPs, and submitting it with their income tax return.

It is important to note that Post-Secondary Education Capital Withdrawals, representing the return of original contributions, are not considered taxable income. Consequently, these withdrawals are not reported on a T4A slip and do not need to be included on either the subscriber’s or the beneficiary’s income tax return.