My three kids chose different educational paths. How do I withdraw RESP funds in a way that’s fair to them and avoids unnecessary taxes?

students at university with resp studying on quad

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Q. I have a Registered Education Savings Plan (RESP) for my three children, the youngest of whom is starting university this fall. We have made some withdrawals for the older two kids but the plan is still well-funded. Our middle child has decided to pursue a co-op university program, which is essentially self-funded. When we contributed funds to the plan, part of the funds were put aside under his name and the government added grants to that. To be fair to him (and to avoid taxes), I assume there is a minimum amount that I should withdraw as an educational assistance payment (EAP) for him. What are my next steps?

–Paul

A. Congrats on thinking ahead, Paul. And you’re correct: There is likely a minimum educational assistance payment (EAP) withdrawal you’ll want to make, which will benefit you both. That amount depends on how fully funded your RESP is.

As a reminder, the EAP is made up of the government grant (up to a maximum of $7,200) and the accumulated earnings on both your contributions and the grant itself. The grant can be shared among all the children in a family plan but only up to $7,200 per child—if they have already received that maximum, you cannot share another child’s grant with them. If the grant is not used, it must be returned to the Government of Canada.

This is why you should make sure you withdraw the entirety of the grant from your RESP.

But don’t go withdrawing just yet, as there are restraints to consider too. With an EAP, you can only withdraw $5,000 in the first 13 weeks. Of course, this doesn’t include the capital portion of the RESP—you can withdraw as much as you like from that, as it consists of the contributions you’ve made over the years.

So, you’ll want to withdraw that $5,000 as soon as possible, and then whatever remains after the 13-week mark. That may seem simple enough, but the complicating factor is tax.

The beneficiaries of the RESP, your children, are taxed on those EAP withdrawals (but not capital withdrawals). Most post-secondary students don’t have a large taxable income, so tax isn’t often an issue.

However, since your middle child has fewer educational expenses, your new goal becomes finding a way to get the grant out as fast as possible while ensuring he pays the least amount of tax.

The typical RESP withdrawal strategy is to take out the maximum amount from the EAP in the first 13 weeks at the start of their post-secondary program, as this is the year when children generally have the lowest income, so it makes sense to withdraw the most at this point. You’ll want to look at the child’s taxable income and then gauge how much should come from the taxable and non-taxable portions of the RESP. Based on that, you can then make a decision to draw the remaining EAP or to spread it out over the remaining years. You will also want to consider withdrawing all of the EAP before entering the final spring semester. This is the year when a student may have the highest tax rate, as they’re set to graduate in the spring and could potentially move into a full-time career shortly after.

So, that’s how a withdrawal strategy typically goes. Getting back to your unique situation, remember that after 13 weeks you can draw as much from an RESP as you would like— it is not dependent on school costs. Also, it is only the grant, if maximized, that has to go to a specific beneficiary. This gives you an opportunity to time your EAP withdrawals. If the grant has not been maximized, you can also take advantage of the different tax rates of each of your children.

For example, if two of your children didn’t find employment this past pandemic summer, it may make sense to draw a larger sum than usual from their taxable EAP, even if they don’t need the money. If there is any extra money, it can be added to their TFSA or your TFSA. When the money is needed by any of your children, it can be distributed where it’s necessary.

If you haven’t maximized the grant for each child, you can share the grant among your children. More of the EAP could go to the child with the lowest tax rate. Just remember the maximum grant each child can receive is $7,200.

Finally, you’ll want to withdraw all of the RESP money by the time your children have completed their post-secondary education. If you don’t and there is still money remaining in the RESP, you can draw all the original capital tax-free, while any remaining EAP will be taxed at your marginal tax rate plus an additional 20%. If you have RRSP contribution room you can transfer the EAP to your RRSP and claim a deduction.

If you find yourself in a situation where you have maximized your RRSPs and you have money remaining in an RESP, it may make sense to delay drawing the money until the RESP has to be closed, in the 36th year after opening.

While the money is in the RESP, the growth is tax-sheltered. In the years ahead, one of your children may return to post-secondary education, and you may find yourself in a lower tax bracket.

So yes, there is a minimum EAP you should draw, but make sure you get the grant. Even though it will be taxed, you and your son will still come out ahead.

Allan Norman, M.Sc., CFP, CIM, RWM, is a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached at atlantisfinancial.ca or [email protected].

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