Government grants and investment gains that have accumulated in your RESP are taxable income to the student which usually means little or no tax on this money.
Since students tend to get higher paying internships or jobs when they are in their later years of school, it usually makes sense to withdraw income, as an Educational Assistance Payment (EAP), in the earlier years.
Your student is 18 and has enrolled in a post-secondary school. You have been contributing $208 monthly to your child’s RESP for 18 years and have received the full CESG allotment of $7,200. Let’s assume that you have received an average rate of return of 4% over that period of time. The RESP funds available at the time of enrolment would be $72,550*.
|Contributions||Plan income (grants, investment gains, loyalty bonus)|
|Amount in RESP||$40,660||$31,890|
|Taxation at withdrawal||Not taxed||Taxable to the student|
|Strategy||Withdraw these funds as a Post-Secondary Education Payment when the student’s income is higher (usually in later years)||Withdraw these funds as an Educational Assistance Payment (EAP) when the student’s income is lower (usually in earlier years)|
* Investment gains are based on an assumed 4% rate of return with income compounded monthly until July of the first year of post-secondary enrolment, net of all estimated fees. Actual value of your plan may vary depending on the investment performance of the plan. As every situation is different, consulting with your accountant for tax advice is recommended.
Although you can withdraw your contributions tax-free at any time, you should avoid it unless absolutely necessary. Withdrawing before your child enters postsecondary school will result in the government clawing back the grant money they contributed.
If your child decides not to attend postsecondary school, your RESP investment gains can be withdrawn as an Accumulated Income Payment (AIP). Since AIPs carry a hefty tax (regular income tax + an additional tax of 20%, or 12% for residents of Quebec) you are well-advised to keep that income tax-sheltered by moving it to your RRSP. You can do that by filling out the T1171 – Tax Withholding Waiver and providing it to your Knowledge First RESP expert.