RESP Withdrawal rules

It’s that time of year again when students of all ages head back to school. For younger students, parents are reminded to think ahead and put money into RESPs to help pay for post-secondary education.

Related article: RESP Contribution rules

For those that are now going to post-secondary school, it’s not about putting money into RESPs as it is about getting money out of RESPs.

It’s important to note that 2014 was the first possible year for children to have reached the maximum Canada Education Savings Grant (CESG) of $7,200. There have been thousands of parents across the country with kids who have hit and will hit the $7,200 maximum grant. When it comes to RESP withdrawals, families that are not careful and do not pro-actively use their CESG money may be faced with the potential of having to pay some of it back to the Government down the road!

Let’s walk through an example of Jessica (Mom) and her daughter Brandi who is now going to post-secondary college for the first time to help understand the RESP withdrawal rules

Over the years, Mom has managed to maximize the CESG grant (with a little help from Brandi’s grandparents). $36,000 of contributions went into the RESP. The government contributed the $7200 in grants (CESG). The total value of the RESP is now $61,000 so there is $17,800 of investment growth in the account. Now that Brandi is 18 and going to post-secondary education, these RESPs are going to come in very handy.

Withdrawals from the RESP

To get money out of the RESP, the first step is to contact the financial institution that holds the RESP (in this case, it’s Mom’s financial advisor) to request a withdrawal. The terminology used is the subscriber (Mom) initiates the withdrawal and not the beneficiary (Brandi the daughter). Only the person that sets up the account can initiate the withdrawal.

Related article: Terminology of RESPs

Proof of education

In order to make withdrawals, the RESP beneficiary must attend a qualified post-secondary educational facility as determined by the government. Proof that the beneficiary is enrolled in a qualifying educational program at a post-secondary school level at a designated educational institution is required.

The definition of a qualifying post-secondary education facility is quite broad. As long as you are getting a certificate or degree, it probably qualifies. If you are not sure, you can check with the financial institution that holds your RESP or even the Canada Revenue Agency (CRA). The government has a Verification of Enrolment Form

In 2007, rules were changed to also allow for part-time studies to count for RESP withdrawals.

Some RESP withdrawals are tax-free

If we look at the example of Brandi’s RESP, CRA looks at all the money deposited by her mom ($36,000) as after-tax contributions and therefore any withdrawal of these contributions are not taxable on the way out of the RESP. When Mom originally put money into the RESP, there was no tax deduction and thus there is no tax on the way out. These withdrawals are called Post Secondary Education Payments (PSE).

The government looks at the contributions as Mom’s money. As a result, it is Mom who must request the withdrawal. Mom can have the money go into her bank account or the money can go directly to Brandi at Jessica’s request. There is no limit on the amount of PSE that can be withdrawn once the child goes to a qualifying post-secondary institution and the money does not have to be used directly for Brandi and her education. Mom can take out the $36,000 she put in any time she wants once Brandi is going to school and remember, there is no tax on the PSE.

Some withdrawals are taxed and restricted

If the contributions can be withdrawn tax-free, then the rest of the money in the account is government grants ($7200) and investment growth ($17,800). Any withdrawals of non-contributions are considered taxable to the student (Brandi). CRA calls this Educational Assistance Payments (EAP) and the financial institution will issue a T4A tax form in Brandi’s name for EAP payments only.

Unlike withdrawal of contributions (PSE) which is non-taxable and the limits are unrestricted, the withdrawals of EAP are not only taxable to the student but also limited in the first year.

There is a $5000 limit on EAP withdrawals in the first 13 weeks of schooling. When making withdrawals from RESPs, it is important to designate where the money is being withdrawn from because that affects the taxation of the withdrawal. 

It is also important to designate if the money being withdrawn is CESG money because any CESG money that is left over must be returned to the government. It is important that the CESG is withdrawn while Brandi goes to school so none of it is left over.

Final strategies

The current balance of the RESP is about $61,000. $36,000 of the total amount is contributions that her mom put in and the rest is government money ($7,200) and growth ($17,800).

Even though Brandi only needs $3500 for tuition and books in the first year, Mom decides to take out the $5000 allowed in the first 13 weeks of school. It is important that mom specifies that the entire $5000 CESG is taken out first.

She gives Brandi the $3500 to pay for tuition and books and an extra $500 as a congratulations gift to buy some new clothes but keeps the remaining $1000 to hold for future expenses that may arise in the school year.

At this time, Mom could also withdraw $36,000 out of the RESP with no tax consequences. If she leaves it in the RESP and it continues to make money, any growth would be taxable to Brandi at the time of withdrawal.  This is better than mom investing the money outside the RESP because Brandi is in a much lower tax bracket than mom. 

Let’s say that Mom wants to take out $14,000 from the RESP in the second year to not only pay for tuition but also help Brandi purchase a car. $4000 would go to tuition and books and the other $10,000 can be used towards the purchase of a car. For this withdrawal, Mom should take out the remaining $2200 in CESG first so that all the government money is used up. Then the remaining amount ($11,800) can either be PSE (tax-free withdrawal of mom’s contribution) or EAP (money taxable to Brandi). With a little help from their accountant, Mom decided that $6800 would be EAP and $5000 would be PSE.  After the second year, there will be approximately $11,000 of growth left in the plan (no CESG left) and $31,000 of mom’s original contributions. 

Brandi is in a 4-year program so if we look ahead to the last 2 years of school, mom plans to take $5500 per year of EAP for 2 years to use up the remaining taxable portion of the RESP.  After that most or all withdrawals will be the remaining contributions or PSE.  Here’s a chart summarizing the withdrawal plan for the RESP.

  CESG EAP PSE Total
  $7,200 $17,800 $36,000 $61,000
Year 1 -$5,000     -$5,000
Year 2 -$2,200 -$6,800 -$5,000 -$14,000
Year 3   -$5,500   -$5,500
Year 4   -$5,500   -$5,500
  $0 $0 $31,000 $31,000

 

I recommend that everyone develops an RESP withdrawal plan (especially when you have more than one child) and the key to this chart is to make sure you have a plan to use up the CESG and the EAP columns.  As you can see, when withdrawing money from RESPs it’s important to understand the RESP withdrawal rules. It’s especially important to balance withdrawals based on the different tax rules and the CESG when withdrawing money. Also, make sure your advisor or bank understands the rules. 

More than one child

According to Financial Advisor Jeff Burchill in Sarnia, Ontario “When requesting money from RESP accounts from various financial institutions, it is important to always look at the EAP vs the PSE, but we never consider how much of the EAP is CESG and the Fund companies or banks have not been telling us unless we ask for those specifics.” 

Burchill also shared an example of a family with 3 kids where it was critically important to specify that withdrawals are grant money.

Imagine a case where there are 3 children, and all 3 children have received the max CESG of $7,200. Let’s say for simplicity that it is a Family plan. There is $21,600 in total CESG in the account. Assume the first 2 kids only use $5,000 of CESG each. By the time the 3rd kid gets around to using the RESP, there is still $11,600 of CESG in the account. The 3rd child can only use $7,200 and the other 2 kids have no interest in going back to school, just to use up some money. $4,400 would have to be sent back to the Gov’t!

Burchill feels parents need to pay attention to this when considering RESP withdrawals. If not, there may be a lot of parents giving money back to the Gov’t in the coming years. Unfortunately, I have met many people that were not told about the different tax rules for RESP withdrawals.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

19 Responses to RESP Withdrawal rules

  1. If one has subscribed to an RESP through an education savings company, the withdrawal rules can be very different. The principal is usually returned the first year and then the earnings and grants in the following years. This could mean that all of the educationa assistance payments might not go to the student.

    • Hi Jim,

      In addition to tax considerations, parents must pay close attention to how much is withdrawn from the RESP to support post secondary costs. Withdrawing too much RESP funds in any one year can have a financial impact on the post secondary student.

      Students applying for government financial assistance (OSAP) in Ontario and College/University bursaries, scholarships and grants are needs tested. Receiving RESP funds can reduce the amount of government assistance and otherwise non repayable bursaries, scholarships and grants.

  2. Regarding withdrawal of contributions, it is the financial institution that frequently sets the rule that withdrawal of contributions (or PSE) can only take place while the beneficiary is attending post-secondary education.

    However, the CRA website states: “Subject to the terms and conditions of the RESP, the promoter can return your contributions to you tax-free when the contract ends or at any time before.”

    I am currently waiting for clarification on our self-directed RESP, but I believe we can take out any amount of contributions at any time with no consequences. Named beneficiaries do not need to be enrolled or attending eligible post-secondary education or training.

    For my twenty-something daughter this will be most helpful. She doesn’t plan to attend eligible post-secondary education or training, primarily because the institution she will attend was not aware of steps needed to be “certified” and qualify. So I may need to draw on contributions to pay for my daughter’s educational training, if the institution can not be “certified” in time.

    I have requested this institution take the simple steps to be “certified” by HRSDC in order to qualify as a institution eligible for EAP payments. What qualifies seems to very liberal. Non-university credit Institutions that qualify for EAP payments are on the HRSDC’s and ESDC’s Master Certification List. The BC component of the list contains institutions with names containing terms such as “Alter Ego”, “The Wonderdogs”, “School of Natural Nutrition”, “Centre for Spiritual Living Kelowna”, “Aviation Schools”, “Yoga Training”, “Equine Therapy”, etc.

    References:

    CRA:
    http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-e.html#P212_12714

    HRSDC Master Certification List:
    Go to 4th link under section 6(k) of:
    http://www.cra-arc.gc.ca/tx/rgstrd/resp-reee/fq-eng.html

  3. How long do ‘contributions’ need to remain invested in the RESP? When withdrawn, before maturity, what happens with the ‘earned grant’? is it taken back, withdrawn by the government, or remain as a taxable benefit to be claimed eventually by the beneficiary?

  4. As a grandparent, or alternate contributor, can we actually own an RESP for our grandchildren, separate from the divorced parents? (ie) Parents don’t have the resources to contribute and giving them access would be risky. We would like to create an RESP for our grandchildren, retain ownership of our contribution and be responsible for withdrawals down the road. We believe that we can maximize our investment and benefit by doing this. Later on, if parents are in a better situation and would like to start contributing, not sure if they can start contributing separately or not. Can they create their own and the government monitors or links the two accounts to ensure there is no duplication in funding? Can you provide any insight?

    • Yes, Grandparents can open a RESP for their grandchildren. However, I have seen situations where one set of grandparents open a RESP and the other set of grandparents do the same and they do not talk to each other so overall, they have overcontributed to the RESP. If there is more than one RESP for child, the limits apply to the child, not per account. The government does not monitor this for duplicate funding so be careful.

  5. I moved to the Netherlands on a temp. visa and now find my RRSP are not well placed with TD Bank. I would like to move them to BMO. Both banks says because I live out of country I have no rights to remove them? I am sure if I took a trip to Canada I would walk into either banks and do the transfer, but would have to lie about my residency.

  6. I have a little trouble with the following statement and the CESG withdrawal amounts shown in the example Chart “It is also important to designate if the money being withdrawn is CESG money because any CESG money that is left over must be returned to the government. It is important that the CESG is withdrawn while Brandi goes to school so none of it is left over“. Based on interactions with my bank (BMO) and published CRA prescribed withdrawal rules for RESP’s, my understanding is that the CESG portion of the PSE funds withdrawn cannot be dictated by the subscriber (or beneficiary). CRA dictates the % amount of CESG the subscriber can withdraw as a proportion of PSE funds requested. For example if I decide to withdraw $5000 of PSE funds for my child’s education cost, roughly $4000 is automatically deducted from the “income earned” portion of the RESP, and only $1000 is actually deducted from the CESG balance. By doing this CRA ensures that the subscriber fully exhausts/depletes the income portion of the RESP account prior to depleting the CESG balance. I also read this and found the calculation process dictated by CRA to the banks that sets the rules/controls on how funds are dispersed. Please comment as to whether I have misunderstood the article. Thanks.

  7. I am not sure that you are able to request the amount of CESG being paid out first for an EAP. I was told that there is a CRA formula that dictates the proportion of CESG that is paid out on an EAP. It is based on the total earnings in proportion to the CESG.

  8. I have a self directed resp with a bank and will have money left over after my son graduates. Will I be able to contribute to my rrsp with the left over funds?

  9. One thing that is important to note – if you are a grandparent setting up an RESP for your grandchild, please be sure to specify a second subscriber (your child ideally) in case you pass away before the kids go to school. Some banks will transfer in kind to another account but in some cases you may lose some money. Much simpler to specify a 2nd subcriber for simplicity and to ensure that your family will not have any more things to worry about after you pass away. (I think they call it a successor subscriber but that may not be the right terminology). Should be a mandatory step at the time the account is opened in my opinion.

  10. I am wondering, if I made contributions and my child will never use them. What is the best way to get at that money? Can I transfer it to RRSPs?

  11. Hello – My husband and I hold an RESP for our grandson. He does not need all the funds for schooling and
    we heard at one time that the balance if not used could be put toward the purchase of a first time home.
    Is that true or is it not? I can not seem to find anything relating to this.
    Thanks for a reply,
    Dixie

  12. Since the start of RESP withdrawals in 2016 TD has released only small amounts CESG. This is year 4 and I am concerned about a residual having to returned. As many have recommended I have requested that the first $7200 all come from the grant.
    I just received the Bank statement on $5000 payment of child #2 and they did it again. The break down is AIP $41742.65 and only CESG $872.35. The advisors keep telling me not to depend on what you and other advisors write they are following the CRA formula. I cannot find in the CRA information the limits they are referring to regarding CESG withdrawal.
    Thanks for all your great articles and giving some perspective to my confusion

  13. Victor. I would recommend reading section 6.1 of this link to CRA’s prescribed calculation method to RESP advisors/institutions.

    https://www.canada.ca/en/employment-social-development/services/student-financial-aid/education-savings/resp/resp-promoters/user-guide/section3.html#h2.2-h3.5

    Imposed this question a few weeks ago when Jim first published this article. It is incorrect in my opinion, for this article to state that you can withdraw any portion of the CESG to help fund your child’s education. The CRA calcs ensure that you drawn down the vast majority of you accumulated gains/earnings in the RESP in a ratio of about 5:1 (this ratio changes as the RESP is depleted). My example in the previous post mentions how when withdrawing $4000 from the investment earnings in our RESP, only $1000 of the CESG could be depleted at the same time.

    Hope this helps,

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