What Happens to an RESP If It’s Not Used?

A Registered Education Savings Plan (RESP) is a dedicated savings vehicle for post-secondary education, allowing tax-deferred growth on investments. It helps families finance costs like tuition, books, and living expenses. However, if the designated beneficiary does not pursue post-secondary education or funds remain unused, important considerations arise regarding the disposition of the RESP funds.

Transferring to Another Beneficiary

When the initial beneficiary of an RESP does not utilize the funds for post-secondary education, a common alternative is to transfer the RESP to another eligible beneficiary. This option allows the RESP to maintain its tax-deferred status, avoiding immediate tax consequences on the accumulated earnings. The new beneficiary must typically be under 21 years of age at the time of designation, though exceptions exist for transfers between siblings within a family RESP. Family RESPs offer particular flexibility, as contributions, earnings, and government grants can be shared among multiple beneficiaries. This structure allows for a seamless reallocation of funds if one sibling decides not to pursue higher education, ensuring the money continues to serve its intended purpose within the family and helping to retain government grants.

Withdrawing Original Contributions

Subscribers to an RESP always retain the right to withdraw their original contributions without incurring any tax liability. These contributions were made with after-tax money, meaning they are considered a return of capital when withdrawn. This can be a straightforward option if the beneficiary opts against post-secondary studies, or if the plan has reached its maximum duration, which is generally 35 years from its inception. The withdrawal of original contributions does not generate a tax slip for the subscriber, nor do these amounts need to be reported as income on a tax return. This ensures that the principal amount invested is returned to the subscriber without any penalties or additional taxation.

Handling Government Grants and Bonds

Government contributions, specifically the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB), are generally subject to specific repayment rules if the RESP funds are not used for eligible educational expenses. This repayment occurs, for instance, if the RESP is terminated or if the beneficiary does not enroll in a qualifying post-secondary program. The CESG provides a 20% match on annual contributions up to a certain limit, with a lifetime maximum of $7,200 per beneficiary, while the CLB can provide up to a lifetime maximum of $2,000 for eligible children. While these amounts are typically returned to the government if unused for education, a limited exception allows the CESG to be shared with another sibling if they have available grant room in their own RESP. The Canada Learning Bond is generally tied to the original beneficiary and must be returned if not used by that individual for education.

Accessing Accumulated Income

If an RESP is not fully utilized for educational purposes, the investment income accumulated within the plan, known as an Accumulated Income Payment (AIP), can be withdrawn by the subscriber, though this option is typically considered a last resort due to its unfavorable tax implications. An AIP is subject to the subscriber’s regular income tax rate, plus an additional federal tax of 20%. To qualify, beneficiaries must generally be at least 21 years old and not eligible for educational assistance payments, and the RESP must have been in existence for a minimum of 10 years. The entire AIP amount is reported as income on the subscriber’s tax return in the year it is received. For example, a $10,000 AIP would add this amount to taxable income, incurring an additional $2,000 federal tax (20% of $10,000) plus the regular marginal tax rate.

Transferring to a Registered Retirement Savings Plan

A strategic option for handling unused RESP income is to transfer it to a Registered Retirement Savings Plan (RRSP). This allows the investment income to continue growing on a tax-deferred basis, avoiding the immediate and punitive tax implications of an AIP. Strict conditions must be satisfied for this type of transfer, including sufficient available RRSP contribution room, the RESP being open for at least 10 years, and all beneficiaries being at least 21 years old and not currently enrolled in post-secondary education. The maximum amount of RESP income that can be transferred to an RRSP is $50,000 per subscriber. While the transfer itself is non-taxable, it consumes the subscriber’s RRSP contribution room, meaning a transfer of $30,000 of RESP income would decrease available RRSP contribution room by that amount. This transfer effectively defers the taxation of the RESP investment income until it is eventually withdrawn from the RRSP in retirement, typically at a lower marginal tax rate.