New tax year brings new chance to withdraw strategically from this registered plan (2024)

The month of January, and, consequently, the new tax year, creates a fresh planning opportunity for post-secondary students to stay one step ahead of the taxman in 2024. This is particularly true when it comes to managing registered education savings plan (RESP) withdrawals to minimize taxes.

An RESP is a tax-deferred savings plan that allows parents (or others) to contribute up to $50,000 per child to save for post-secondary education. The addition of government money in the form of matching Canada Education Savings Grants (CESGs) can add another $7,200 per beneficiary.

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For parents ready to utilize the funds accumulated in an RESP to help pay for a child’s post-secondary education, it’s important to have a good understanding of the tax rules associated with RESP withdrawals at the beginning of the tax year in order to help reduce tax on those withdrawals throughout the entire year.

To get a handle on the best way to do this, let’s review how RESP withdrawals are taxed. For starters, contributions, which were not tax deductible when made to an RESP, can generally be withdrawn tax free when the student attends post-secondary education. These are called refunds of contributions (ROCs), and no tax slip is issued by the RESP promoter when these funds are paid out. Consequently, they are not reported on any tax return.

Any other funds coming out of an RESP while the child attends post-secondary education are referred to as educational assistance payments (EAPs). This includes the income, gains and CESGs in the RESP. EAPs are generally taxable to the student, and tax is paid on those EAP withdrawals at the student’s marginal tax rate for ordinary income.

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For example, let’s say Harvey contributed $2,500 annually toward his son Eric’s post-secondary education via an RESP starting in the year Eric was born. He chose this annual contribution level to maximize the CESGs, which are equal to 20 per cent annually, or $500. After about 13.5 years, Harvey stopped contributing, having already put in the $36,000 necessary to maximize the $7,200 in CESGs.

Note that parents who have extra funds and wish to continue saving for their child’s education beyond the amount necessary to maximize the CESGs can choose to contribute up to $50,000 per child to an RESP, although the CESGs max out at $7,200.

At the end of 18 years, assuming a compounded annual return of six per cent, the RESP will be worth approximately $86,000. Of this amount, $36,000 is Harvey’s original RESP contributions, $7,200 is the total amount of CESGs and the balance, $42,800, is the income and growth.

How should the funds be withdrawn from Harvey’s RESP in 2024 to fund Eric’s post-secondary education?

Let’s assume Eric is living away from home, pays tuition of about $7,300 this year and has another $18,000 of expenses for books, housing, food, travel and other sundry expenses in 2024. Should the $25,300 come from tax-free ROC payments? Or would it be better to withdraw potentially taxable EAPs? Or perhaps a combination of both?

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Parents may be initially tempted to choose ROCs as the ideal source of tax-efficient RESP withdrawals since, by design, they can be withdrawn tax free. In our example, Harvey may be thinking about taking the entire $25,300 needed in 2024 as ROC to defer any tax on the EAPs until a future year.

But if the ultimate goal is to reduce the family’s taxes while funding a child’s studies, it may be better to withdraw some EAPs each year to fully use the student’s basic personal amount and other available credits, such as the federal tuition credit.

For 2024, the federal basic personal amount (BPA) is $15,705, meaning that a student (or anyone, for that matter) can receive up to this amount of income, including EAPs, before paying any federal income tax. Because the BPA is non-refundable — it’s a use-it-or-lose-it credit — if a taxpayer doesn’t fully utilize it in a particular tax year to shelter income from tax, the unused portion is lost forever. It can’t be used to generate a tax refund, nor can it be carried forward to a future tax year.

If Eric had no other income in the year (for example, no part-time nor summer employment earnings), he could receive approximately $23,000 (the BPA of $15,705 plus the federal tuition credit of $7,300) of EAPs without paying tax. The remaining $2,300 of the $25,300 he requires in 2024 could be taken as ROCs.

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Now, let’s assume Eric earns $13,000 during the year from part-time and summer employment. If he requires another $12,000 to meet his annual budget, it may make sense to take $10,000 in the form of EAPs, which effectively will be tax free due to the BPA and federal tuition credit. Again, the remaining $2,300 could be taken as ROCs. In both cases, there might be a minimal amount of provincial tax to pay, depending on the student’s province of residence.

Also, keep in mind that for 2024, a student may receive up to $28,122 in EAPs without having to demonstrate to the RESP provider that such a withdrawal request is reasonable. And, as of last year, the government increased the dollar amount of EAPs that can be withdrawn in the first 13 weeks of education to $8,000 from $5,000 for full-time studies.

Finally, if RESP funds are sufficient to fund post-secondary expenses, any excess employment income earned by the student during the year may be sheltered in a tax-free savings account (TFSA) or even the new first home savings account (FHSA). A student could choose to contribute up to $8,000 of their income to an FHSA, and thus shelter it from tax by claiming an offsetting deduction. Or the student may choose to save the deduction for a future year when they’re in a higher tax bracket.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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