What, how much and when it’s available

The basic structure of the Registered Education Savings Plan (RESP) has been around since the 1970s. They allow for tax-free savings and investment growth to help pay for post-secondary education, and since the 1990s have been supplemented by a range of government support programs.

This article looks beyond how RESPs are funded and grow, to what ultimately matters most to parents and students – which is how they are put to work paying for that education once it is underway.

Knowing what’s inside, to explain how it comes out

In order to follow the different ways that money comes out of an RESP, it helps to first identify the source of that money. Here are the three main money components, along with a brief point about the tax consequences of each:

Personal contributions

An RESP subscriber (commonly parents) may enter into a contract with an RESP promoter to save for one or more student beneficiaries. The contributions made by the subscriber are not tax-deductible; however, they are also not taxable when withdrawn. The current lifetime contribution maximum is $50,000 per beneficiary.

Government assistance

No tax is due when government assistance is paid to an RESP, whether from the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB) or a provincial government program. Amounts are taxable when later paid to a student as part of an educational assistance payment or EAP (discussed below).

Accumulated income

Earnings on both contributions and government assistance are tax-free while within an RESP. That accumulated income is taxable in the year of a withdrawal, either to the student when paid as part of an EAP, or to the subscriber when paid in the form of an accumulated income payment or AIP (discussed below).

Withdrawals for education purposes – Educational Assistance Payment (EAP)

An RESP is designed to assist with education expenses once a beneficiary is enrolled in post-secondary schooling. Most often that will be a full-time program leading to a degree, diploma or certificate, but part-time and distance learning may also qualify, including apprenticeships for skilled trades. The government maintains a list of all eligible programs and institutions.

Most of the RESP withdrawal rules relate to the conditions and tax treatment of EAPs, which are comprised of the latter two of the three components described above: government assistance and accumulated income. Whether paid to the student or to an educational institution on his or her behalf, the student is taxed on all EAPs taken in the January-December taxation year, regardless of the school year in which they are enrolled.

Though the entire EAP is taxable, the RESP promoter tracks the proportion drawn from each of government assistance and accumulated income. The relevance of this distinction will become clearer below when we look at the treatment of a refund of contributions after a student completes (or chooses not to continue with) schooling.

What kind of educational expenses qualify?

There is no fixed list of qualifying expenses. Instead, according to the RESP Provider User Guide: “An RESP promoter is not required to obtain receipts from a beneficiary as proof of expenses before making an EAP. The RESP promoter determines whether the EAP helps further the beneficiary’s education, whether it is reasonable, and whether the payment complies with requirements of the Income Tax Act and the terms of the plan.”

The 13-week limit and 6-month horizon

The EAP limit during the first 13 consecutive weeks of enrollment is $8,000 for full-time studies, or $4,000 if studying part-time. (These amounts are as of 2023, with the 2023 Federal Budget having announced the increase from the previous $5,000 and $2,500 respectively.) If tuition and related payments are higher, the RESP promoter must obtain approval from the government on a case-by-case basis before approving a higher EAP amount.

After 13 weeks, there is technically no annual limit on the amount of EAPs that can be paid, though the 13-week rule is re-applied if the student is out of school for 52 weeks or more. As an outer boundary, a student can receive payments for up to six months after a program has been completed, so long as the expenses would have qualified as EAPs if they had been paid before the student’s enrollment ended.

Reviewing large EAP requests

Despite there being no annual EAP maximum, it doesn’t mean the floodgates are wide open. To reduce the administrative burden on RESP promoters, the Canada Revenue Agency (CRA) has a yearly EAP threshold below which it will not question the reasonableness of EAPs. It was set at $20,000 in 2008, indexed thereafter in line with the Consumer Price Index. The figure for 2024 is $28,122.

Below this amount, the RESP promoter is not expected to assess the reasonableness of each expense, but more scrutiny will be applied above the threshold. Also, bear in mind that CRA may later inquire into those expenses, so receipts should be retained as proof should the need arise.

Refund of contributions

A subscriber may, at any time, request a refund of contributions. A refund is not taxable, whether paid to the subscriber or directed to the student. Either way, RESP contribution room is not restored when there is a refund.

However, if a student is not qualified for an EAP when a refund is taken, a portion of the CESG and CLB may have to be repaid. The repayment is based on the proportion of refunded contributions that previously attracted that assistance. When this happens, any repaid CESG entitlement is lost, but repaid CLB entitlement is restored.

To avoid this effect, a subscriber could withdraw all contributions once a student is qualified for EAPs, leaving all remaining government assistance to continue to grow tax-shelterd within the RESP. One option for the refunded amounts would be to invest within the the tax-free savings account of the parent-subscriber and/or student.

Withdrawals when not enrolled – Accumulated Income Payment (AIP)

In limited circumstances where it is clear that it will not be possible for the RESP to pay an EAP, the accumulated income may be paid as an AIP. This payment is made to the subscriber and is subject to regular income tax plus an additional tax of 20%. The additional tax can be avoided if an equivalent contribution is made to the subscriber’s Registered Retirement Savings Plan, provided the subscriber has available RRSP room.

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.

A tax-sheltering tool to help with post-secondary education

The Registered Education Savings Plans (RESPs) assist subscribers (usually parents) to save for post-secondary education for beneficiaries (usually their children). RESPs provide three main financial benefits:

• • Government money is added to the subscriber’s personal contributions
  • Tax-sheltered growth of both the personal and government money in the plan
  • Tax is usually borne later by the student-beneficiary, who will typically be at a lower tax bracket than contributors

How are RESPs set up?

To set up an RESP, a subscriber contracts with an RESP promoter (an offering financial institution) to save for the education of a beneficiary. The subscriber may then make contributions to the plan or invite anyone else to contribute.

A beneficiary must be a Canadian resident with a social insurance number (SIN) when the plan is opened. Any person may be a subscriber, but usually it is the beneficiary’s parent. The SIN of the subscriber must also be provided to register the plan in the tax system.

Most plans are set up as an individual plan with one beneficiary, or a family plan where the beneficiaries are related siblings or cousins. There are also group plans administered based on age-determined groups.

There’s no minimum or maximum beneficiary age to open an individual plan. You can even set one up for yourself. Contributions may be made for up to 30 years, and the plan may stay open for up to 35 years. If the beneficiary qualifies for the disability tax credit, these timelines are extended by 5 years.

What is the maximum allowable contribution and what is the tax treatment?

In terms of personal contributions, there is no maximum annual contribution limit, as long as the lifetime personal contribution does not exceed $50,000 per beneficiary. There are however annual limits to the amount of government assistance (see below), which could influence personal contribution timing.

Tax treatment depends on source of the money and timing:

• • Personal contributions are after-tax, meaning there is no tax deduction at that time.
  • Government assistance is not taxable when credited to a plan.
  • While in the plan, there is no tax on income earned on either personal or government contributions.
  • When taken out, all income and government assistance are taxable to the beneficiary when paid as education assistance, but withdrawal of personal contributions is not taxable.

How much government assistance can subscribers receive?

There are three main sources of federal government support (and some provinces also have programs):

Canada Education Savings Grant (CESG)

Basic CESG is a 20% matching grant of up to $500 annually, to a lifetime maximum of $7,200. Carryforward room must be claimed before the beneficiary turns 18 years of age. In theory, if cash is available, the full lifetime $50,000 contribution could be made in one year, but then only a single year’s CESG would be collected, leaving thousands of government support money unused.

Additional CESG

On the first $500 of annual contributions, extra support is provided to low- and middle-income families. Family income thresholds are indexed annually, with figures for 2024 being:

• • Additional 20% grant, up to $100, if family income is up to $55,867, or
  • Additional 10% grant, up to $50, if family income is up to $111,733.

Canada Learning Bond (CLB)

For a child in a low-income family, the CLB provides $500 in the first year, then $100 annually to age 15, for up to $2,000 total. No personal contributions are required. The CLB is in addition to CESG benefits. The family income threshold begins at $55,867 in 2024 if there is one child in the family, increasing with more children.

How are funds withdrawn from the plan? What is the tax treatment for withdrawals?

The subscriber may choose how much and what type of draw is to be taken from the RESP:

Education Assistance Payment (EAP)

An EAP can be paid to assist a beneficiary who is attending qualified education, training or an apprenticeship program – either in Canada or abroad. As a distribution of the plan’s government assistance and accumulated income, the full amount is taxable to the beneficiary.

The EAP limit during the first 13 consecutive weeks of enrollment is $8,000 for full-time studies, or $4,000 if part-time. Thereafter, there is technically no annual limit, but the plan administrator must obtain more detailed documentation for amounts over a set annual amount, which is $28,122 in 2024.

Refund of contributions

Personal contributions can be returned to the subscriber at any time without tax consequences, as long as the beneficiary is enrolled in a qualifying program at the time. If not, the withdrawal of personal contributions may trigger repayment of recent years’ government assistance, according to a formula based on the timing of the original contributions.

Accumulated Income Payment (AIP)

This is a taxable payment of any remaining income in the plan to the subscriber, generally only if the beneficiary will not be attending school. An extra 20% tax applies, which may be avoided by rolling the AIP amount into an RRSP (assuming the subscriber has at least that amount of room in their RRSP). The plan must then be closed by the year following the AIP.