Start drawing EAPs early to help ensure they get used, but also try to spread them out over enough years so that they are offset by tax credits and little or no tax is paid. “We want to take EAPs fast, but taking them too fast could have a tax impact,” says Tam. Each year you can top up the remainder of your kids’ funding needs with withdrawals from contributions, which have no tax consequences.
When you make a withdrawal, you need to tell your advisor or financial institution how much of it comes from EAP and how much comes from “contributions” (which is also called “capital”). (The allocation of the EAP withdrawal to “grants” and “income” is proportional to the current balances in each category.
You can only withdraw $5,000 in EAP money in the first 13 weeks of post-secondary schooling, but generally there is little restriction after that while your kid is in school.
You need to show proof of enrolment but no receipts, although you could possibly be asked to demonstrate that very large EAP withdrawals over $20,000 in a year are being used broadly to further your kids’ education.
Here’s how to figure out roughly how much EAP money you can withdraw each year without federal and provincial income tax, using 2017 figures. Start with the basic personal tax credit that everyone gets ($11,635 for federal taxes). Then add a tax credit for tuition paid (we’ll assume $9,000 for a full-year at school). Then subtract income (we’ll assume $7,000 from a summer job), offset partly by job-related tax credits for EI, CPP, and employment ($1,465 federally in this example).
In this case you should be able to withdraw roughly $15,100 in EAP money in 2017 without your kid having to pay any significant amount of income tax ($11,635+$9,000-$7,000+$1,465). (If your kid’s gross income is relatively low, you can also transfer up to $5,000 of unused federal tuition credit to a parent.) In this example you would pay no federal tax but would pay a small amount of provincial tax in some provinces because of differences in provincial tax practices.
If you take out a few thousand dollars in EAP above that threshold, expect that your kid would pay income tax on the excess in the lowest income tax bracket (about 20% in Ontario and B.C., as examples). To do your own calculations, I recommend the income tax calculator at taxtips.ca.
4. Deplete the RESPs near the end of university
RESPs are designed to provide funding only while your kids are in school, which probably fits your needs anyway. However, if the RESP continues on after they leave post-secondary education (or they never attend), then special onerous rules apply to withdrawals. Therefore you should generally use up all the funds while your kids are still in school.