It’s December as this is being written, not traditionally when we talk about back-to-school matters.
For parents whose child launched a full-time post-secondary career this past September however, there is an important threshold reached around this time. The upper limit on some Registered Education Savings Plan payments are eased once the beneficiary/student has completed 13 consecutive weeks in a qualifying educational program – which would be roundabout the beginning of December.
Before getting into the details of this threshold, let’s provide some context by looking at how funds are drawn from a RESP.
Accessing RESP money
The extraction of funds from a RESP is covered by a network of qualifying rules, which in turn can affect the continued use of the plan. A payment out of a RESP will generally fall under one of these categories:
Educational Assistance Payment (EAP)
An EAP is defined in the Income Tax Act as an amount, other than a refund of payments (most often a “refund of contributions” described below), paid out of a RESP to or for beneficiaries to assist them to further their education at the post-secondary level. Each payment comprises accumulated income and government grant/assistance money, and is taxable as regular income to the student in the year received.
The Canada Revenue Agency considers an EAP to be a broad term, but does not provide specific guidance on what that may encompass. Instead, CRA’s general approach is that if payments are made in accordance with a particular registered plan, the respective RESP trustee will comply with the ITA requirements.
A full-time student may become entitled to an EAP once enrolled in and attending a qualifying educational program.
Refund of contributions
Plan subscribers (parents most often) are entitled to the return of their own after-tax contributions, which accordingly are not taxed upon receipt. Depending on the plan terms, this could be payable to plan subscribers personally or to the student. If the student is not qualified for an EAP at the time, part of the refund will have to be paid back to the government proportionate to the amount of grant/assistance the plan received.
Accumulated Income Payment (AIP)
In limited circumstances where it is clear that it will not be possible for the RESP to pay any EAPs, the income earned within the plan may be paid out as an AIP. This type of payment is made to the plan subscriber and is subject to regular income tax plus an additional tax of 20%.
Payment to a designated educational institution
In situations where neither an EAP nor an AIP can be made, the plan income must be paid to a Canadian educational institution which would otherwise qualify for EAP purposes. This is basically a forfeiture of the income as the subscriber does not receive a tax slip or a donation receipt.
EAP annual limits and the 13-week threshold
There are limits on the early access to most RESPs. For full-time students, the EAP limit is $5,000 during the first 13 consecutive weeks in a qualifying educational program. If tuition and related payments are higher, on a case-by-case basis the government may approve a higher EAP amount.
After that 13-week threshold has been crossed, there is technically no limit on the amount of EAPs that can be paid, so long as the student continues to be qualified. Of course that doesn’t mean that the floodgates are open; any EAP request will still have to satisfy the requirement of being for a bona fides cost of financing post-secondary education.
Administratively, CRA relies upon RESP trustees to process the bulk of submitted expenses. Since 2008, its administrative approach is to allow the payment of up $20,000 (to be indexed annually by the Consumer Price Index) without the RESP trustee having to assess the reasonableness of specific items, nor to require the production of receipts or a list of expenses. Above that figure, a list of expenses would be necessary as part of the RESP trustee’s diligence or review to assess the reasonableness of the amount. Also bear in mind that CRA may later inquire into those expenses, so receipts should be retained as proof should the need arise.
Finally, be aware that $5,000/13-week rule will apply once more if the student has been away from school for a period of 52 weeks or more.