Do RESPs Count As Income?

Whether you’ve already started saving money using a Registered Education Savings Plan (RESP) for your child’s post-secondary education or have a little one on the way, you may be wondering whether your contributions are considered income and how they affect your taxes. The good news is, RESPs are designed to be tax-efficient, so understanding how they work can help you avoid unexpected costs and make the most out of every dollar you save.

Today, we’ll break down how RESP withdrawals work, what is subject to taxes (and what isn’t), how to properly report it on your income tax, and smart strategies you can use to minimize what you owe.

Breaking Down RESP Withdrawals

Before you can understand how RESPs are taxed, you first need to know that withdrawals from your RESP account will fall into two categories: your original contributions and educational assistance payments (EAPs).

Original Contributions to a Registered Education Savings Plan (RESP): Not Taxable

This is the money you deposit into your child’s RESP account over the years. You’ve already paid tax on this money when you earned it. So, these contributions can be withdrawn tax-free.

Education Assistance Payment (EAP): Taxable Income

This money comes from government grants, investment income, and in some cases, additional grants or bonds:

Canada Education Savings Grant (CESG)

The CESG is a federal government grant that matches 20% of your RESP contributions up to $500 a year per child, per year, for a lifetime maximum of $7,200.

Canada Learning Bond (CLB)

The CLB is a government incentive designed for low-income families, adding up to $2,000 into the account for each RESP beneficiary.

Investment Earnings

This is the growth your RESP contributions and government grants earn over time through interest, dividends, or capital gains.

This money grows tax-free until it’s withdrawn. While taxable, this investment income is withdrawn by the student (and not the subscriber), who is often in a lower tax bracket. A student’s taxable income will be relatively low, as they only work part-time, if at all, when attending a qualifying educational program.

How Educational Assistance Payments (EAPs) Show Up on a Tax Return

When your child receives an EAP, they’ll also receive a T4 tax slip. Again, this tax slip is issued in the student’s name, not your name. The total amount of EAPs withdrawn for the year will be found in Box 041. As the RESP withdrawals are taxed at the student’s marginal tax rate, they’ll likely owe little to no tax that tax year.

Students can also claim their tuition and education credits using a T2022 form from their post-secondary education program, which can help lower their taxable income even more.

Does It Affect the Subscriber’s (Parent’s) Income?

The short answer is no, it won’t affect the subscriber’s income. Even if you were to withdraw your original contributions, you won’t pay income tax on this money, as you already did when you earned it.

Accumulated Income Payments (AIP) & RESP Roll Overs

Sometimes, plans change. If your child decides not to attend post-secondary education, or they don’t use their full RESP funds, you may be wondering what happens with the remaining money.

Although RESP accounts can remain open for 35 years, there may come a time when you decide to close the account. In this case, you’ll withdraw what is known as an accumulated income payment (AIP).

What is an AIP?

An AIP is the investment income left in your RESP account that wasn’t withdrawn as an EAP. Therefore, if you, the subscriber, withdraw the investment earnings, you will pay the marginal tax rate plus an extra 20% on top of this.

How to Avoid This

Don’t panic. If you have available contribution room in your registered retirement savings plan (RRSP), you can transfer up to $50,000 of your AIP into your RRSP. By doing so, you can avoid the 20% penalty tax and defer the income tax until you withdraw from your RRSP later in your retirement.

Note: To qualify for this tax deferral, your RESP must have been open for at least 10 years, and other conditions apply.

Impact on Benefits & Student Aid

Another common concern Canadian families have is whether their RESP withdrawals affect their child’s student aid or other benefits, such as the Canada Workers Benefit (CWB), GST/HST Credit, and loans like the Ontario Student Assistant Program (OSAP).

EAPs qualify as income for the student. But remember, because they generally have a low overall income, the impact of withdrawing this money will be minimal.

For student loans, income levels are assessed differently. While RESP contributions are factored into student aid loans, they are not always considered dollar-for-dollar against their eligibility. For example, if a student receives $5,000 in EAPs, it doesn’t mean their OSAP loan or grant is reduced by exactly $5,000.

Many families withdraw between $5,000 and $8,000 per year in EAPs without significantly impacting their child’s benefits or student aid. That said, this can vary by province, so it’s worth checking with your provincial aid office.

Strategies to Minimize Income Tax Implications

Although students pay little to no tax on their EAPs, planning can make their withdrawals more efficient and financially smart:

1. Spread Withdrawals Over Numerous Years

   Rather than withdrawing large EAP amounts in one year, spread them out throughout your beneficiary’s post-secondary education to keep their income tax as low as possible.

2. Time Withdraws When Tuition Credits Are High

   If your child’s tuition is higher in some semesters than others, it may be a good time to withdraw more EAPs. Their tuition tax credit can help offset their EAP income, lowering their taxes owed.

3. Use Part-Time Post-Secondary Education (PSE) Withdrawals

   Even if your child is attending post-secondary school part-time, you can make PSE withdrawals. These will allow you to withdraw your contributions tax-free and smaller EAP amounts.

Reporting Checklist & Key Deadlines

Stay organized during the tax season by keeping these steps and deadlines in mind:

February

• Look out for T4 slips in your child’s name. They will be issued by your RESP provider.
• Look for Box 042 to see your total EAP amount.
• Ensure your child’s SIN is accurate.

March/April

• Your child will receive their T2022 slip from their school. This will outline their tuition tax credit.
• Make sure to file a tax return for your child, even if no tax is owed.

Final Thoughts

RESPs are a powerful tool Canadian families can leverage when saving for their child’s future education. While some parts are taxable, they’re typically taxed in the student’s hands, at very low rates, if at all.

Have more questions about withdrawals? Contact an Embark financial advisor today!