“What you do today can improve all your tomorrows.” – Ralph Marston
Over the past couple of weeks, I’ve fielded a number of questions about using and repaying the LLP and thought that it would be worth sharing some of the questions and the answers in this week’s post.
What is the LLP?
LLP stands for Lifelong Learning Plan. The LLP is a program that allows Canadian residents to borrow up to $20,000 from their RRSPs in order to cover the costs of a full-time further education program for themselves, their common-law partner or spouse. The money can be withdrawn without tax consequences (as long as it is repaid on time) and without the loss of RRSP contribution room.
Does it Matter What I Study?
In order to qualify for the LLP, you must either be enrolled in a full-time course or have received an offer to enroll before March of the following year, and the school you’re attending must be one that qualifies for the Education Tax Credit. To be considered full-time, the course you choose must run for at least three consecutive months and require you to spend at least 10 hours per week on course work. If you’re a disabled student, you may qualify to use the LLP to fund part-time studies.
How Much Can I Withdraw?
Provided that you meet the conditions for participating in the LLP, you can withdraw a maximum of $10,000 per calendar year, to a total LLP limit of $20,000.
How Do I Make a LLP Withdrawal?
To make a withdrawal under the LLP, you need to complete form RC96 and submit it to the bank or financial institution where you hold your RRSP account. The institution will process the withdrawal and either directly deposit the funds to your bank account or mail you a cheque. You can then use the funds towards your education costs or living expenses. Unlike regular RRSP withdrawals, withdrawals made through the LLP are not subject to withholding tax and are not considered taxable income.
Do I Have to Repay the LLP loan?
Yes! You have up to 10 years to repay the amount you withdrew through the LLP starting in either the fifth year after you made your first withdrawal or the second year that you can no longer claim the education tax credit, whichever is sooner. Each year you have to repay a minimum of 1/10 of the amount of your LLP loan. If you’re not sure whether or not you have to make a repayment in a given year, you can work through the following questions to figure it out:
- Is this the year of your first LLP withdrawal? If you answered YES then no repayment is required. If you answered NO then go to question 2.
- Is this the fifth year after your first LLP withdrawal? If you answered YES then you must start repaying this year. If you answered NO then go to question 3.
- Are you entitled to claim the education tax credit as a FT student for at least 3 months this year? If you answered YES then no repayment is required. If you answered NO then go to question 4.
- Were you entitled to claim the education tax credit last year as a FT student for at least 3 months? If you answered YES then no repayment is required this year. If you answered NO then you must start repaying this year.
How Will I Know How Much I Owe?
Each year, the CRA will send you a LLP Statement of Account with your Notice of Assessment. It will tell you what your LLP balance is and the minimum amount you have to contribute to your RRSPs and designate as a repayment for the following year. It will also detail your total LLP withdrawals; the amount you have repaid to date (including additional payments and amounts you included on your tax return because they were not repaid) as well as any cancellations or income inclusions.
How Do I Repay My LLP Loan?
LLP repayments are made as RRSP contributions and identified when you file your tax return. You can choose to allocate as much of your RRSP contributions to your LLP balance as you want but If you don’t make any RRSP contributions in a year that you’re required to make a LLP repayment or, if the amount you contribute is less than your required repayment amount then the shortfall is counted as income by CRA and taxed according to your marginal tax rate.
Jenny borrowed $20,000 under the LLP. This year she is required to repay $2000. She contributed $3000 to her RRSP account this year. On her tax return, Jenny designates $2000 of her RRSP contributions to the LLP and $1000 as regular RRSP contributions. She receives a tax deduction on her $1000 of regular contributions and her LLP balance is reduced by $2000.
Fred also borrowed $20,000 under the LLP and this year is required to repay $2000. He contributed $1000 to his RRSP account this year. On his tax return, Fred allocates his $1000 RRSP contribution to the LLP. The remaining $1000 he owes is added to his income for the year and taxed at his marginal tax rate. His LLP balance is reduced by $2000.
Gina borrowed $15,000 under the LLP and this year is required to repay $1500. She made no contributions to her RRSP this year. On her tax return, the $1500 that Gina owes is added to her income for the year and taxed at her marginal tax rate. Her LLP balance is reduced by $1500.
How Many Times Can I Use the LLP?
You can use the LLP as many times as you like provided that any previous LLP balances have been completely repaid.
Should I Try to Repay my LLP Early?
Whether or not to repay the LLP early depends on your personal situation. From a mathematical perspective, the faster you repay your LLP, the quicker your money can be back in your RRSP and working for your future. However, if you’re in a higher tax bracket then it might make more sense to contribute as much as possible to your RRSP but only allocate the minimum required amount to your LLP balance each year in order to take full advantage of the tax deduction.
While I’m not a huge fan of dipping into retirement savings for non-retirement needs (that’s another post!), the LLP offers a way for Canadian residents under the age of 71 to use their RRSP money to fund full-time education without the usual tax consequences associated with RRSP withdrawals. While nowhere near as popular as the Home Buyers’ Plan, the LLP helps makes education and training more accessible and opens the door to higher earning potential.