With the return of autumn, many families have turned their attention to school. If (grand)children are off to pursue post-secondary education, the rising cost of higher education may be top of mind.
As investors, we have the opportunity to assist (grand)children with education at all levels. For starters, we can provide advice about money, teaching the fundamentals of saving, investing and taxes. We may also choose to put aside financial resources to support the cost.
A Registered Education Savings Plan (RESP) is an excellent starting point. Under this federal plan, up to $50,000 can be contributed per child beneficiary. While contributions to the RESP are not tax-deductible, investment income within the plan is tax deferred — that is, no taxes are payable while the assets remain in the plan. When payouts to the student are made for approved educational purposes, only then will the income be subject to taxes and in the hands of the child. In most cases, the student will have a low marginal tax rate, so the taxes owing will be low or non-existent. A key attraction is the Canada Education Savings Grant. The government will match 20 percent of annual RESP contributions to a maximum grant of $500 per beneficiary per year (or $1,000, if unused contribution room exists from a previous year), with a lifetime limit of $7,200 per beneficiary.
If you have an RESP beneficiary attending a qualifying program, congratulations! In brief, here are some withdrawal considerations:
Track RESP withdrawals according to their source. There are three sources: i) grants, ii) contributions and iii) accumulated income (AI)— income or gains made on contributions and grants. Grants and AI may be paid out to the beneficiary as an Education Assistance Payment (EAP), taxable in the student’s hands. Generally, any unused grants will be clawed back and unused AI may be subject to a penalty tax. Original contributions can be withdrawn, tax free, at any time, or paid tax free to a qualifying beneficiary. When withdrawals are made, you will need to specify how much comes from each bucket.
Think about how you will time withdrawals. Consider drawing EAPs early when a child’s income is low (depending on summer jobs and co-op programs). It may be beneficial to spread EAPs over several years to make use of tax credits, such as the basic personal amount and tuition tax credit.
Deplete the account, before it’s too late. While you can only withdraw $5,000 of EAPs in the first 13 weeks of enrolment, there is generally little restriction after that period while enrolled. Be aware that for payments received after a beneficiary is no longer enrolled, unused grants may need to be repaid and AI payments may be subject to a penalty tax. There is a six-month grace period after enrolment has ceased that allows for RESP withdrawals to qualify as EAPs.
Explore alternatives if a child will not attend school. The RESP can remain open until the end of the calendar year that includes the 35th anniversary of its opening. If plans have changed, there may be options to transfer the RESP to a sibling or transfer AI to a parent’s Registered Retirement Savings Plan, subject to various conditions.
For more information, see the Government of Canada website.
This article was originally published in the Autumn 2021 newsletter, "Challenging the Trend." Click here to view.
The views expressed are those of Wes Ashton, Director of Growth Strategy and Portfolio Manager, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund.