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Canadian Tax and
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RESP Withdrawals

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Registered Education Savings Plans (RESPs)
Disabilities  -> Payments out of the RESP

How Are The Funds Paid Out of The RESP, And Are They Taxable?

An RESP consists of the following:

bullet contributions made by the subscriber
bullet contributions of government grants, including
bullet Canada Education Savings Grants (CESG)
bullet Canada Learning Bond (CLB) grants
bullet Alberta Centennial Education Savings (ACES) Plan grants
bullet accumulated earnings on all contributions

After administration and other fees are paid to the promoter out of the RESP contributions by the subscriber, how the funds are paid out depends on whether or not the beneficiary pursues post-secondary education.

If the beneficiary uses the funds for qualifying educational programs, the tax consequences are as follows:

bullet The subscriber contribution portion of payments to the beneficiary or subscriber is not taxable, and there is no restriction on how these funds are used.
bullet The CESG and accumulated earnings on all contributions are paid out to the beneficiary as Educational Assistance Payments (EAP), and are considered taxable income to the beneficiary.  However, the beneficiary may claim tuition tax credits and education tax credits to offset the income.

CESG Not Payable to Non-Resident Beneficiary

Canada Education Savings Grant Regulations s. 10(3)

Note that if the beneficiary of the RESP is a non-resident at the time of Educational Assistance Payments, then the CESG portion of the RESP cannot be paid.  A beneficiary can be a student at a foreign educational institution and still be considered a Canadian resident in some cases.  See our information on Canadian residents.

Tax May be Payable on RESP Payments

Income Tax Act Part X.5 s. 204.94 Payments under Registered Education Savings Plans

If the RESP is not going to be used by the beneficiary for qualifying educational programs:

bullet the assets of the RESP can be transferred to another RESP under certain circumstances
bullet subscriber contributions can be refunded tax-free to the subscriber or beneficiary, after all fees are paid to the promoter out of these contributions.
bullet CESG must be repaid.
bullet earnings are forfeited with some plans, or
bullet earnings may be paid out to the subscriber, under certain conditions, as Accumulated Income Payments (AIP).
bullet The subscriber must be resident in Canada
bullet AIP are subject to regular income tax plus an additional 20% tax
bullet both taxes may be avoided if the AIPs are transferred to the RRSP of the subscriber or the subscriber's spouse.  There must be sufficient contribution room in the RRSP, and the transfer is limited to a maximum of $50,000.

Accumulated Income Payments (AIP)

Income Tax Act s. 146.1(1), 146.1(7.1), 146.1(2)(d.1), 146.1(2.2)

Accumulated Income Payments (AIP) can only be made if any one of the three following conditions apply:

bullet the plan has existed for 10 years and each individual (other than a deceased individual) who is or was a beneficiary has reached 21 years of age and is not eligible to receive an educational assistance payment ;
bullet the plan has existed for 26 years, unless the plan is a specified plan (in general a non-family plan where the beneficiary is entitled to the disability tax credit for the beneficiary's tax year ending in the 22nd year of existence of the plan) in which case the plan has existed for 31 years;
bullet all the beneficiaries under the plan are deceased.

RESP Beneficiaries With Disabilities

CRA may waive the conditions for AIP payments if it is reasonable to expect that a beneficiary under the plan will not be able to pursue post-secondary education because he or she suffers from a severe and prolonged mental impairment.

See also - links to all information on TaxTips.ca related to persons with disabilities.

Transfers from an RESP to a Registered Disability Savings Plan (RDSP)

 

Revised: February 14, 2016

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