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Unused RESP savings – use it or lose it?

Education Savings: What happens to the money in an RESP if the child doesn’t go to college or university?

Many Canadians fear they’ll lose all the money in their RESP if the child doesn’t to university or college. That is not the case if you have an Individual or Family RESP.


Note: Those offered by “scholarship plans” work differently and each plan will have its own rules and restrictions.


If the beneficiary delays post-secondary education

The money invested can simply continue to grow tax-sheltered as the RESP can remain open for 35 years.


If the beneficiary decides not to pursue post-secondary education 

As the subscriber of an Individual or Family RESP, you have several options, including:

  1. Name a new beneficiary

  2. Transfer assets to another eligible RESP

  3. Transfer the accumulated income to an RRSP*†

  4. Withdraw the funds

  5. Transfer the earnings to a Registered Disability Savings Plan (RSDP)†

  6. Donate the earnings to an educational institution

Name a new beneficiary. In a Family Plan, contributions, earnings and grants (other than the Canada Learning Bond) are automatically shared by all beneficiaries. (For the differences between an Individual and Family RESP, read this.)


For both an Individual and Family RESP, to keep the government grants (again other than the Canada Learning Bond) and avoid potential tax consequences, the new beneficiary must be under 21 years of age and be a brother or sister of the former beneficiary.


If the new beneficiary is not related by blood or adoption to an original subscriber of the RESP, the contributions will be added to their contribution history so take care to avoid the tax consequences of an over-contribution.


In all cases, because the Canada Learning Bond (CLB) is tied to that particular beneficiary, it would be returned to the government.

Transfer assets to another eligible RESP. Generally speaking, for an eligible transfer to a Family RESP, both plans must have a common beneficiary or a beneficiary in the receiving RESP must be a sibling of a beneficiary in the transferring RESP (note: some or all government grants may have to be repaid if all Family RESP beneficiaries are not siblings).


For an eligible transfer to an Individual RESP, the beneficiary must have been under 21 years of age when the receiving RESP was opened and must be a sibling of a beneficiary in the transferring RESP.

As mentioned above, because the Canada Learning Bond (CLB) is tied to that particular beneficiary, it would be returned to the government.


Transfer the accumulated income to an RRSP Government grants must be returned, but the growth is kept. Up to $50,000 of earned income can be transferred into the subscriber’s regular or spousal RRSP – provided the subscriber has sufficient RRSP contribution room (as they will receive a contribution receipt for the amount transferred). Note the money cannot be transferred to the beneficiary’s RRSP.

Withdraw the funds. Government grants will be returned at the time of the withdrawal but growth is kept. The money that was contributed to the RESP over the lifetime of the plan may be withdrawn and returned to the subscriber. Contributions withdrawn are not subject to any additional tax.


The subscriber can also elect to receive the income earned in the form of an Accumulated Income Payment (AIP). AIPs are taxable income for the subscriber and are subject to the usual withholding tax rates for registered plans plus 20% additional tax (varies by province). Note that AIPs are lump-sum withdrawals that cannot be paid to the beneficiary or transferred to an RRSP.


Transfer the earnings to a Registered Disability Savings Plan (RDSP) The RESP and RDSP must have a common beneficiary who is eligible for the Disability Tax Credit. Contributions must be made before the end of the year in which the beneficiary turns 59. The rollover is taxable at the time the disability assistance payment is made and cannot not cause total contributions to exceed $200,000.


In addition, one of the following conditions must be met:

  • The beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent him/her from pursuing post-secondary education or

  • The RESP account has been in existence for at least 10 years and the beneficiary is at least 21 years of age and is not pursuing post-secondary education or

  • The RESP has been in existence for more than 35 years

Donate the earnings to an educational institution. Some RESPs, such as AGF’s RESP, allows for the amount of earnings remaining in the RESP (i.e., whatever remains after eligible amounts have been transferred or converted) to be paid to a designated educational institution in Canada provided that:

  • The beneficiaries are not eligible for an Education Assistance Payment (EAP)

  • Incentive(s) have been repaid, as required

  • The subscriber does not qualify for an AIP

All grant incentives received that remain within the account at the time of the withdrawal will be returned to the federal and/or provincial governments.


A payment to a Canadian designated educational institution would be a gift and not a donation so a tax receipt will not be issued to the subscriber or to the beneficiary

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CLEMENT CHUNG, CFP, CLU

Certified Financial Planner

Fee-Based Financial Planning
Burnaby & Metro Vancouver

©2018 by Clement Chung.