What Happens to an RESP If Your Child Doesn’t Go to University?

Life doesn’t always follow the path you think your child is going to take. Maybe they decide to take a gap year, start their own business, or skip post-secondary education altogether. If you’ve been contributing to a Registered Education Savings Plan (RESP) for as long as your child has been alive, you may be wondering what happens to the money in your account if your child doesn’t pursue school as you once had planned.

The good news is that you have options. RESPs are flexible, and with the right strategy, you can maintain your savings, reduce your tax implications when making withdrawals, and transfer the money from the RESP to another family member.

Stick around to learn more about what choices you have in our practical guide below.

Start With Your Family’s Goals

The first step is to determine your family’s goals. Ask your child whether post-secondary education is off the table entirely or simply delayed? Are they open to alternative educational programs like apprenticeships, trade schools, or part-time studies?

Your decision should reflect your long-term financial plans and your comfort level with potential tax implications:

• School is deferred: You may want to keep the RESP account open to allow your investment growth to go undeterred while your child decides what they want to do moving forward.
• Your child chooses a different path: Consider transferring the money from the RESP to a sibling or yourself using a Registered Retirement Savings Plan (RRSP) rollover.
• Education is off the table: Start planning your withdrawals by understanding grant repayment obligations and tax rules.

Ultimately, taking the time to match your goals with your RESP options will help you make a decision that aligns with your bigger financial goals.

Keep the RESP Account Open (Don’t Rush to Close It)

One of the most common misconceptions about RESP accounts is that you need to close the account as soon as your child decides on their educational future. In reality, an RESP can remain open for up to 35 years, which is one of many RESP benefits that give your child the flexibility and time they need to figure out what they want to do with their life.

Why Keeping Your RESP Open is the Best Move

Closing your RESP prematurely can trigger government grant clawbacks and taxable withdrawals. Here’s why keeping your RESP open can benefit you in the long run:

• Flexibility: Your child may change their mind in a couple of years and decide they do want to attend college or university.
• Growth: Your investments within the account will continue to grow tax-deferred.
• Options: Keeping the account open allows you to transfer funds, roll over your earnings, and withdraw money later on.

Change the Beneficiary or Transfer to a Sibling

If your child doesn’t use their RESP funds to pursue higher education, you can transfer the money from your child’s RESP to another eligible beneficiary, such as a sibling. Here’s how this works:

Individual RESP Plans

With individual plans, you may be able to change the beneficiary on the account, but whether you can keep the government grants you’ve received will depend on the age and relationship of the new beneficiary.

For example, if the new beneficiary is under the age of 21 and is a blood-related (or adopted) sibling of the original beneficiary, the Canada Education Savings Grant (CESG) and other grants can transfer over without being clawed back. However, if the new beneficiary isn’t a sibling or is over the age limit, some or all of the grant money will be repaid to the government.

Family RESP Plans

Family RESPs are designed for families with multiple children, making them a lot more flexible. Any eligible sibling in the plan can use the RESP contributions, and grants typically stay intact as long as each beneficiary doesn’t exceed their $7,200 lifetime CESG limit. So, if one child doesn’t attend a qualifying educational program after high school, the money can be transferred to another child, provided grant limits are not maxed out.

Things to Keep In Mind

• Grant money from the CESG and the Canada Learning Bond (CLB) can only transfer to a new beneficiary if they qualify.
• Provincial programs like the Quebec Education Savings Incentive (QESI) or the British Columbia Training & Education Savings Grant (BCTESG) may have their own rules.

Withdraw Your RESP Contributions Only

If no one will be using your RESP money, your contributions can be withdrawn tax-free, as you’ve already paid taxes on it. The only trade-off to this is that any grants tied to these contributions must be repaid to the federal government.

All in all, this option allows you to recover your net contributions without incurring any tax consequences.

Government Grants: What Happens if They’re Not Used For the Child’s Education?

Grant money from the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) is a great way to supplement your savings. But it’s also conditional.

If your RESP withdrawals aren’t tied to education expenses, your grants must be returned to the government. This “clawback” applies whether you close your RESP account or withdraw your money for non-educational purposes.

To reduce grant losses:

• Transfer the money to a sibling if eligible.
• Wait before closing your account.
• Opt for partial withdrawals if your child decides to attend a qualifying program part-time.

Earnings: Educational Assistance Payments (EAP) vs. Accumulated Income Payments (AIP)

RESP contribution withdrawals fall into two categories:

Education Assistance Payments (EAPs)

EAPs consist of grants and earnings, which are paid to the student when they enrol in post-secondary school education. When withdrawn, this money is considered taxable income in their hands, which is often a low marginal tax rate, given that they typically earn minimal income during this time.

Accumulated Income Payments (AIP)

AIPs are your investment growth that you withdraw from an RESP when no school is pursued. It is taxable in your hands at a regular income tax rate plus an additional 20% penalty tax.

Example:

If your RESP has $20,000 in contributions, $7,200 from CESG, and $10,000 in investment growth, your child can withdraw this money for college or university as an EAP and will be taxed in the lowest tax bracket.

If they don’t use this money for further education, your investment earnings are subject to tax consequences, and the grant money will be returned to the government. Only your original contributions can be withdrawn tax-free.

RRSP Rollover Options (If You Have Contribution Room)

One of the best strategies for unused RESP earnings is the RRSP rollover. You can transfer up to $50,00 of income to your or your spouse’s RRSP if:

• The RESP has been open for a minimum of 10 years.
• Your beneficiaries are at least 21 and not pursuing education.
• You have RRSP contribution room.

This rollover avoids the 20% penalty tax on AIP and defers income tax until you withdraw from the RRSP in retirement.

Provincial Grants & Special Cases

Some provinces have their own available grants:

• BCTESG (BC): $1,200 lump sum for children who are at least 6 years old but have not yet reached their 9th birthday.
• QESI (Quebec): 10 to 20% annual credit, up to $250/year, up to a lifetime max of $3,600.

Note that separate repayment rules apply.

Special Cases

• If your child moves outside of Canada and becomes a non-resident, they can use existing funds, contributions and income, at designated educational institutions abroad, but grants would be returned to the government.
• Part-time programs do qualify for EAP withdrawals.

Step-By-Step Decision Guide

To decide your next steps:

1. Confirm your child is either deferring or opting out of post-secondary school altogether.
2. Review your grant money and investment earnings.
3. Choose your path (keep open, transfer or withdraw contributions. You could also consider rolling your RESP over to an RRSP).
4. Contact Embark for further assistance before you make a final decision.