Canadians contributed $5 billion to RESPs in 2019, bringing total assets to $63.7 billion, according to the most recent Government of Canada figures. So it’s clear many of us with children in our lives recognize the benefits of saving in an RESP, which allows the contributor’s money to grow tax-free until it is withdrawn. Perhaps the best benefit is the fact that a portion of those contributions are matched by the federal government’s Canada Education Savings Grant: up to 20% or $500 per year (on the maximum contribution of $2,500), to a lifetime maximum of $7,200.
When the beneficiary of the plan—the student—needs those funds to pay for post-secondary education expenses, like tuition, housing and books, the money is usually taxed in the student’s hands. But because students’ income is usually much lower than the contributor’s, the tax bill is generally very small, or even $0. (For more information on how to contribute, what you can invest inside an RESP and more, check out the MoneySense explainer.)
Preparing for RESP withdrawals
If you are beginning or close to taking RESP withdrawals, you should consider your investment asset allocation. RESPs are often drawn down over four or less years, and stocks can have a negative rate of return over this short a period. Once you are within five years of beginning withdrawals from your RESP—so once a child enters their teen years—you should consider reducing the exposure to stocks in your RESP. How significant a reduction may depend on your risk tolerance, other savings meant for post-secondary education, and whether the account is a family plan that could be used for younger children as well.
Who should initiate RESP withdrawals, and how?
The person who set up the RESP is the one who requests a withdrawal. Why not the student? The account does not belong to the beneficiary, even though it may be meant for their education. It is owned by the subscriber—often a parent or grandparent, but it could be any adult in the child’s life. It is the subscriber who requests a withdrawal.
The breakdown of the funds in the RESP account is tracked by the financial institution where it’s held: the original contributions, government grant depositions, and investment income and growth. When initiating a withdrawal, the subscriber needs to designate which type(s) are to be included.
Post-Secondary Education (PSE) withdrawals represent the contributions originally made by the subscriber. These withdrawals can be taken at any time, without tax payable and for any reason. They can be directed to the subscriber, to the beneficiary or sent to an educational institution.
If the beneficiary is enrolled in qualifying post-secondary education, the subscriber can request an Educational Assistance Payment (EAP) and have it taxed to the beneficiary. An EAP represents the government Canada Education Savings Grants (CESGs) or other grants, as well as the investment earnings. These withdrawals are directed to the beneficiary unless the beneficiary consents to have the funds go to the subscriber. They can be paid directly to the educational institution as well.
Before a financial institution issues an EAP withdrawal, they will request proof of post-secondary school enrollment for the beneficiary. This generally includes documentation like an admissions letter or fee statement from the school with the student’s name and program information.