RESP withdrawal rules and strategies

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 The contributions made by the subscriber are not tax-deductible; however, they are also not taxable when withdrawn.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.

RESP – Registered Education Savings Plan

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.

The TFSA Shuttle … channeling the Harlem Shuffle

A catalyst in concert with FHSA, RESP and RRSP tax-sheltered savings

In 1986, the Rolling Stones covered the 1963 R&B song Harlem Shuffle. While the original from the duo Bob & Earl was modestly successful, the Stones’ cover topped the charts in some places, peaking at #5 in Canada. The self-proclaimed world’s greatest rock’n’roll band had put their distinctive spin on something good, and made it even better.

Now, no-one’s about to suggest that tax planning is as enticing as a smooth groove, but magic truly can happen when good things come together. To the point, if you take one good thing
– FHSA for a home, RESP for education, RRSP for retirement – and combine it with another
– the ubiquitous TFSA – you really can produce a whole that is greater than the sum of its parts.

TFSA principles

Introduced in 2009, the tax-free savings account (TFSA) allows after-tax deposits to accumulate tax-sheltered and be drawn out tax-free. By contrast, a registered retirement savings plan (RRSP) is funded by pre-tax deposits that (also) accumulate tax-sheltered, and then are taxed on withdrawal.

Comparison of the two plans was inevitable, often framed as ‘TFSA vs. RRSP’. But rather than it being an either-or proposition, a more productive approach is to employ yes-and thinking. Specifically, if the TFSA is used as the entry point into RRSPs or other tax-sheltered plans, that routing can positively exploit a valuable feature unique to TFSAs.

The re-contribution credit

Whereas available room for other tax-sheltered plans is exhausted one-way as contributions are made, the TFSA calculation operates in both directions. For a Canadian resident over 18, annual room has three components:

- The prescribed annual TFSA dollar limit, currently standing at $7,000, +
- Unused room from previous years, +
- Withdrawals made in the immediately preceding year.

It is the third component that presents the opportunity for the TFSA to be used in concert (pun fully intended) with its tax-sheltered siblings. And whereas a catalyst in the chemical sense remains unchanged after influencing a reaction, not only might a TFSA help another plan, the benefit of that interaction can also echo back to the TFSA.

Start me up! (Assumptions)

Meet 20-something Mick. He’s a serial saver for current needs, and is ready to set aside an additional $100 each week to add to his routine. He intends on using a high-interest savings account (HISA) for this, with the going interest rate in early 2024 being 4%. It’s the start of the year and he hasn’t yet used any of his annual TFSA room.

Understanding there are 52 weeks in a year, to avoid a 19^th nervous breakdown doing the math, we’ll use $5,000 for the annual tally. As well, though his cash flow and the HISA terms are bound to vary, we’ll keep them constant here.

FHSA for a home

With the state of house prices, Mick knows he needs to start saving a down payment, for which he wants to use the recently-introduced first home savings account (FHSA). Base annual contribution room is $8,000, with a lifetime limit of $40,000. His plan will have him saving about $5,000 a year, using up his lifetime room in eight years.

Alternatively, Mick could open HISAs for both FHSA and TFSA. Assuming the same terms for each, weekly deposits could be directed to the TFSA, then after 50 weeks in mid-December the balance could be withdrawn and deposited to the FHSA before year-end. It’s important to be attentive to dates for two reasons:

- The TFSA re-contribution credit occurs the next January 1^st, which could be a 365-day swing if it’s missed.
- And though the deduction for FHSA contributions may be carried forward to a later year if desired, it can’t be carried back to an earlier year (i.e., there’s no ‘first 60 days after year-end’ rule as there is for RRSPs).

Timing aside, the average TFSA balance over the year will have been $2,500. At 4% interest, the mid-December balance will be about $5,100.

- An annual TFSA-out/FHSA-in shuttle of that full amount will allow Mick to max his FHSA in a little less than the eight years. With annual TFSA deposits of $5,000 and withdrawals of $5,100, the net re-contribution credit will be $100 each year, giving Mick $800 more TFSA room over the full duration by having used the shuttle option.
- If instead, an even $5,000 is taken out of the TFSA annually, it will again take exactly eight years to fill the FHSA, as if the TFSA had not been involved. However, by using the TFSA as a shuttle, $800 extra TFSA balance will be created, without making any material change to Mick’s investment choices or risk exposure.

RESP for education

Now in his 30’s, Mick had been hoping his son Jack would earn an athletic scholarship for his pole-vaulting prowess. But as he’s grown, it appears that Jack’s jumping skills were just a flash in the sand, and Mick now needs to catch up on contributions to the boy’s registered education savings plan (RESP). With carryforward of past unused room, Mick plans to deposit $5,000 for the next seven years or so, to claim the maximum grant money.

As with the FHSA example above, deposits could go direct to the RESP, or route through a TFSA. The Canada Education Savings Grant (CESG) is the main support program, matching 20% of annual RESP contributions, so $1,000 in our example. By routing through the TFSA, some of that CESG will be delayed a few months as compared to direct RESP contributions. Even so, that’s a small price to pay to obtain the additional TFSA balance or room, which will sum up to just over $700 across those planned years using the same HISA terms.

Another consideration is that once Jack is enrolled in a qualifying post-secondary program, personal RESP contributions can be withdrawn tax-free. The withdrawn amount could be routed back to Mick’s TFSA, assuming there is sufficient room. While the continuing income would be tax-sheltered whether left in the RESP or moved to the TFSA, once again the availability of the re-contribution credit favours use of the TFSA.

If Mick wants to take it a step further, some of those refunded contributions could go to Jack’s TFSA. After all, Jack’s entry into post-secondary will roughly align with him hitting age 18, when he will start getting TFSA room. This could be a good time to establish the knowledge, tools and behaviours to help him on his own personal finance journey.

RRSP for retirement accumulation

As Mick travels through his 40’s, 50’s & 60’s (though some observers feel like he’s the picture of eternal youth), his savings efforts will increasingly focus on retirement. The dollars will be larger – from the amounts saved to their accumulation and on to the annual drawdowns – but otherwise the same fundamentals apply. Mick could go direct into RRSP, or use a TFSA-RRSP shuttle, bearing in mind that larger amounts mean larger re-contribution credits.

There is one more effect to consider, being the annual tax refund Mick can expect to receive after deducting those non-workplace RRSP contributions when filing his annual tax return. If that too is routed to and through the TFSA, it will provide an extra lift to the anticipated TFSA re-contribution credit generated each year.

HISA or market investing?

Saving for retirement and being in retirement can each be decades in length. While a HISA may work for shorter-term purposes like a home purchase or education, it’s not suitable as the core of retirement savings. Indeed, a diversified investment portfolio is generally more appropriate for RRSP savings. In turn, a parallel TFSA portfolio could be arranged to facilitate the intra-year shuttle. With a higher expected (though variable and not-guaranteed) return relative to a HISA, this could be one more boost to the TFSA re-contribution credit.

Mick should consult with his advisor before undertaking this more advanced version of the shuttle concept, to determine what approach best aligns with his knowledge, personal circumstances and risk tolerance.

RRIF for retirement decumulation

Into his 70’s, Mick will have migrated his accumulating RRSPs into the decumulating form of a registered retirement income fund (RRIF) with mandatory minimum annual withdrawals. By default, he would probably take a fixed weekly or monthly spending withdrawal. Alternatively, he could take a lump sum early in the year and route it into a TFSA (HISA being most appropriate for this use), still available for spending, while getting one more TFSA room kicker.

TFSA as the others’ little helper

Over its 15-year history, the TFSA has progressed from novelty to fixture in our financial landscape. By using it as a shuttle, its built-in flexibility can feed into other tax-sheltered plans, while making itself better in the process.