Withdrawing your RESP?

David Christianson, BA, CFP, R.F.P., TEP, CIM

“Dollars and Sense”

Chilly evenings mean August. August means waning days of summer. End of summer means back to school.

The cycle of life in Manitoba.

For young people heading to any type of post-secondary education this fall, there may be an opportunity to make a tax-effective withdrawal from a Registered Education Savings Plan, if one is in place.

An RESP is a tax-deferred vehicle that can be used to accumulate money and earn investment income in an account, with the intention to ultimately use that money to fund post-secondary education.

The first $2,500 contributed each year (while the child is under 17) attracts a government grant of 20%, added into the account. The investment income (interest, dividends and capital gains) are not taxed until the amounts are withdrawn. These two factors make RESPs very effective in maximizing accumulations.

There are three things to remember about RESP withdrawals. First, the student needs to be enrolled in post-secondary education and must ask the institution for a document called Proof of Enrolment. A tuition receipt is not adequate.

The institution could be a university, community college or specialized education, as long as it is on the federal government’s List of Designated Financial Institutions.

There is a first-year rule. In the first 13 weeks of post-secondary education, the maximum withdrawal from growth and grants is $5,000. 

The withdrawal can come from any of the three potential segments of the RESP –

1.   Contributed capital (your money):

2.   Government grants; or,

3.   Investment growth on both.

Withdrawals from capital are tax free at any time. Withdrawals from the grant or growth portion will be taxable to the student.

Our usual advice is to withdraw from growth and grant first, while the student is in school and likely not paying tax. That way, in the future, there is little or no tax liability to worry about when the remaining funds (from capital) are withdrawn.

The advantage here is that most students don’t pay income taxes, as their tuition and education credits usually outweigh their summer earnings.

By the way, the money that is withdrawn from an RESP does not have to be specifically spent on tuition, supplies or other verifiable education expenses, and no receipts are required.

Tax breaks for students

The current federal government eliminated the education and textbook tax credits for students in 2017. However, there is still a Manitoba Education Tax Credit.

Post-secondary tuition fees are still claimable both federally and provincially, for students 16 and older. The amount is shown on the tax certificate issued by the school, called a T2202. These are usually only available online.

CRA allows a transfer of up to $5,000 of these tax tuition credits onto the tax return of a spouse, a supporting parent or grandparent. In those situations, the taxes for the supporting person are reduced.

Alternatively, the student can carry these amounts forward to offset taxes in a future year, instead of transferring them.

We suggest that students file a tax return, even if there are no taxes due. This builds up eligibility for future RRSP contributions at a rate of 18% of any employment or self-employment income, and possible carryforwards of unused credits and deductions. Low income students may also be eligible for refundable credits and grants, like the GST (HST) tax credit at age 19.

Enjoy the rest of your summer!

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

Please consult legal, tax and investment experts for advice on your unique situation.

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David Christianson, BA, CFP, R.F.P., TEP, CIM is a Certified Financial Planner and senior advisor with Christianson Wealth Advisors, a Senior Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.