One of the most important lessons a person can learn on entering the workforce is that it’s as important to save as it is to earn in the first place. In effect, you are paying your future self now, commonly through the use of a registered retirement savings plan (RRSP).
But the route from worker to retiree is not always a straight line. Whether due to an involuntary work displacement or a conscious decision to pursue a new direction, many people return to school to upgrade their skills and improve their future prospects.
While public programs may be available for some of those retraining costs, it is usually up to the individual to shoulder the bulk of the burden. Fortunately, our tax system allows RRSP savers to help themselves in such circumstances, through the Lifelong Learning Plan (LLP).
LLP suspends tax on withdrawals
Put simply, under the LLP a withdrawal from an RRSP is not taxable in the year of withdrawal. No interest is charged at any time, and so long as the total amount is paid back to an RRSP within the prescribed time requirements, no tax will apply (other than under the normal RRSP rules applicable on later withdrawals).
Qualified participants
The LLP can be used to help finance a person’s own education or that of a spouse or common law partner. It is not available for a child’s education.
The RRSP owner must be resident in Canada, though the educational institution may be elsewhere so long as it qualifies for the education amount tax credit. The student must be enrolled in a post-secondary program, attended on a full-time basis (or part-time if the student meets disability conditions). Full time generally means at least 10 hours per week over at least three months.
The LLP can be used if the student is already enrolled, but not if the program is complete. If the student is not yet enrolled, a written commitment from the institution must be received no later than March of the year after the RRSP withdrawal. Participation may continue to no later than the end of the year in which the student reaches the age of 71.
Financial limits
The maximum annual withdrawal limit for the LLP is $10,000, with a total limit of $20,000. These apply on a per-person basis, so that spouses have effectively double the amounts available if desired, and can use the funds on either or both.
For each withdrawal, the RRSP owner confirms qualification and withdrawal amount by completing Part 1 of Canada Revenue Agency (CRA) Form RC96 titled Lifelong Learning Plan (LLP) – Request to Withdraw Funds from an RRSP. This is then filed with the RRSP issuer, who completes Part 2 verifying qualification (to the extent of its knowledge), provides a copy of the completed form back to the RRSP owner and keeps the original for its files.
No tax is withheld or due, but the RRSP issuer will provide a T4RSP slip to the RRSP owner showing the amount in Box 25 “LLP withdrawal.” Once the LLP is opened, an LLP Statement of Account will be appended to the RRSP owner showing the amount.
Continuing deferral and eventual repayment
So long as the qualifying conditions remain satisfied and the 10-year repayment period (described in the following paragraph) has not begun, RRSP withdrawals may continue until January of the fourth calendar year after the year of the first withdrawal.
Repayments must be made over the course of no more than 10 years. A minimum of one-tenth of the total withdrawal is due each year, though more may be repaid if the RRSP owner wishes. This time period will be shortened if the RRSP holder dies, turns 71 or becomes a non-resident.
Repayment must begin no later than the fifth year after the first LLP withdrawal, but may be required sooner. That means that if a first withdrawal is made in 2014, the first repayment must begin no later than 2019, though the payment may be made as late as the first 60 days of 2020.
As to repayments beginning sooner, the CRA monitors the tax returns of LLP students, specifically line 323 of Schedule 11. If the student is not entitled to claim the education amount in two consecutive years, the 10-year repayment period begins in that second year.
Note also that once an LLP balance is repaid in full, the LLP may be used again. In fact, there is no limit to how many times it may be used over a lifetime, and may even be used while there remains a balance in an RRSP Home Buyers’ Plan (HBP), though that could present a strain on finances.
Failure to repay
Be aware that if the RRSP owner pays less than the calculated annual repayment, the underpaid amount will be included as taxable income that year. As no money will have been received by the RRSP owner at that time (it having been spent in a prior year on education), the cash to pay the associated tax will have to come from other sources. This can be a significant financial drain for a very long period of time.
As with the HBP, LLP participants should carefully plan from the earliest stages to assure that the commitment is understood and manageable, and will not inadvertently result in a permanent depletion of RRSP savings.