The Two Types Of RESP Withdrawals: Tax-Free vs. Taxable Payments
By David Fotfleisch
A Registered Education Savings Plan (RESP) is a cornerstone of educational financial planning in Canada. It allows families to save for post-secondary education through personal contributions, government grants, and tax-deferred investment growth. However, many Canadians remain uncertain about how withdrawals are taxed. This article provides a comprehensive overview of RESP withdrawal taxation and general tax planning strategies to minimize exposure.
RESP Withdrawals: Tax-Free vs. Taxable Payments
Withdrawals from an RESP fall into two primary categories: Post-Secondary Education (PSE) Withdrawals and Educational Assistance Payments (EAPs). Understanding the distinction between these two is essential for tax planning.
Post-Secondary Education (PSE) Withdrawals
PSE withdrawals represent original contributions made by the subscriber or eligible contributors. These amounts are not taxable since contributions were made with after-tax income. Subscribers can withdraw these funds at any time, for any purpose, without restrictions or tax consequences.
Educational Assistance Payments (EAPs)
EAPs are composed of government grants such as the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB), as well as investment income earned within the RESP. These payments are taxable in the hands of the beneficiary. The beneficiary receives a T4A slip for all EAPs, and the income must be reported on their return. To minimize taxes, students should claim all education-related credits, avoid large withdrawals, and coordinate EAPs during low-income years.
Unused RESP Funds: Taxation and Strategic Options
If a beneficiary does not pursue post-secondary education, several options exist: transferring funds to an RRSP, an RDSP, or a sibling's RESP, or donating to a Canadian educational institution. If withdrawn as Accumulated Income Payments (AIPs), the subscriber pays tax at their marginal rate plus a 20% penalty unless transferred to an RRSP or RDSP.