More and more Parents and Grandparents are taking advantage Registered Education Savings Plans or RESPs for education. And some of these RESPs have grown a significant amount.
It is always a good time to remember or refresh what makes up an RESP. An RESP has three components; principal, earnings, and grants. From a tax perspective, it’s the earnings and grants (Education Assistance Payments or EAP) that attract taxation. Either in the student’s hands or the subscriber’s if the money isn’t used for education.
So, how do we withdraw the money in the most tax efficient way? Firstly, it’s going to be much more efficient if the money is taxed in the student’s hands. Usually, students have lower income and therefore lower taxation. Recall the Basic Personal Amount is $13,229, and certain education expenses are tax deductible or receive a tax credit. Our rule of thumb is that a student can earn up to approximately $20,000 before they will be paying any taxes. So, if a student had no income, an EAP of $20,000 would go largely un-taxed. As a side note, the maximum EAP for 2021 is $24,676 (Unless it can be demonstrated that more is needed).
If the child doesn’t go to post secondary education, and the subscriber takes this income, it can be very costly. If the subscriber is in the 50% marginal tax rate and takes EAP (grants go back to the government) in as income, the total tax bill could be 70%. This is because there is 20% tax applied in addition to regular income tax. The subscriber could move this amount to their RRSP if they have the contribution room and avoid the 20% tax penalty.
Another caution for grandparents: If you are over the age of 71, you can’t make an RRSP contribution and will be stuck with taking the payment into income, so make sure to plan ahead.
Let’s hope this situation doesn’t arise and the child does go on to post-secondary education. EAPs can be used at a wide range of education institutions both in and outside of Canada. Here’s a link to the qualifying schools, you’ll be amazed at how many there are.
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.