RESP Tax Planning Strategies

RESPs are a valuable tool for parents who are saving for their children’s post-secondary educational costs.  Much is made about the grants that are payable by the government and the tax-deferred growth on the invested capital and grant.  However, the tax implications upon withdrawal are often forgotten about or not considered at all.  It’s important to know what these are to plan a tax-efficient withdrawal strategy when the time comes.

Firstly, we should distinguish the 3 components in an RESP:

  1. Invested Capital (contributions)
  2. Canada Education Savings Grant and other Bonds provided by the government
  3. Growth on the capital and grant/bonds

Withdrawals of the invested capital is not taxable.  There is no deduction on contributions into an RESP, therefore there is no tax implication on the withdrawal of contributions.  However, there are tax implications on the withdrawal of grant and growth.

The Educational Assistance Payment (“EAP”) is a withdrawal made while the beneficiary is enrolled in a qualified post-secondary educational institution.  This is made up of grant and growth and is fully taxable in the hands of the beneficiary.  Typically, this is of little concern given that most beneficiaries are not earning a significant amount of income when withdrawing from the RESP.  The Basic Personal Amount tax credit and Tuition tax credit typically eliminate any taxes payable on the EAP income withdrawn.

The Accumulated Income Payment (“AIP”) is a withdrawal made when the beneficiary is no longer enrolled in a qualified post-secondary educational institution (i.e. graduated, withdrew, etc.).  Similar to the EAP, it is made up of the grant and growth, but is taxable in the hands of the subscriber.  Typically, the subscriber will be in a high marginal tax bracket, which would increase his/her tax liability.  On top of the high marginal tax rate, there is a 20% penalty tax imposed on the AIP as well.  Consequently, a subscriber in the highest marginal tax bracket (Ontario) may be taxed at 73.53% on the AIP.  A subscriber could avoid the 20% penalty tax by transferring up to $50,000 of the AIP into his/her RRSP, provided they had the contribution room.

Knowing these tax rules will allow the subscriber to plan a tax-efficient RESP withdrawal plan.  Speak with your advisor for further questions or clarification.

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