RESP 101: Strategies for Minimizing Tax When Making Withdrawals

UPDATE (August 9, 2024): This article has been updated to reflect changes in legislation and regulations since the date of publication (August 15, 2022).

You’ve worked hard to build a successful business, affording you the ability to create a nest egg that will set your kids up for their own success. Finally, after nearly two decades, it’s time for them to leave that nest and for you to dip into the RESP(s) you’ve been growing to support them.

Below are a few RESP withdrawal strategies to help make sure your kids have enough after-tax dollars to buy those expensive textbooks (and ramen noodles), as well as other credits and tax deductions for education-related expenses.

Understanding Registered Education Savings Plans (RESPs)

RESPs are made up of three types of funds:

1. Post-Secondary Education (PSE) Funds — these are the funds that the subscriber (i.e., you) has been contributing on your child’s behalf. These contributions are not taxable when they are withdrawn from the RESP since you’ve been contributing after-tax dollars. 
2. Educational Assistance Payments (EAP) — these payments can include funds like federal and provincial grants and the Canada Learning Bonds (CLBs). They are taxable when withdrawn.
3. Accumulated income — this is the income that has been earned on your original contributions and the EAP funds. These funds are taxable when withdrawn.

RESP Withdrawal Strategies

Basic Personal Amount

The Basic Personal Amount (BPA) are non-refundable tax credits which allows every taxpayer to earn up to $15,705 (2024) without paying federal income tax on all sources of income, including scholarships, grants, and EAPs. By ensuring your child uses up their BPA room every year, you can allow for more of the non-taxable PSE funds to be withdrawn from the RESP tax-free in the long run.

Tuition Tax Credit

Students in BC also receive non-refundable tuition tax credits. The federal Tuition Tax Credit is equal to 15% of the total eligible tuition costs, which include tuition and applicable fees. If the total elgible costs in 2024 were $5,000, for example, you could credit $750 towards the income tax you owe. The tuition tax credit can often be much greater than this example, and if you combine this with the BPA, students can earn a moderate income and pay no federal taxes. This is another incentive to make sure your child is earning income up to this threshold to maximize their non-taxable income.

EAP Annual Threshold

In 2024, the CRA will allow the RESP beneficiary to withdraw up to $28,122 (indexed annually) with no additional paperwork or requests. If your child is earning little to no other income it might be beneficial for your child to take out the annual threshold even if they don’t need the funds right away. This would create a small amount of tax payable (at the lower tax rates) and would chip away at the taxable EAP fund balance.

Other deductions and credits available to post-secondary students

While the RESP you’ve built will play a major role in funding your child’s education, there are a few other ways you can make sure your child is maximizing their tax savings on education-related expenses.

Moving expenses

Moving expenses are a tax deduction for full time post-secondary students. The moving expenses can be deducted against scholarships, fellowships, bursaries, and research grants (taxable amounts). Keep in mind, the new home must be 40km closer to your child’s school for the expenses to be eligible. Visit the CRA website for a full list of which expenses are considered eligible.

Interest paid on student loans

The interest paid on student loans are a non-refundable tax credit. If your child has no tax payable, they can claim the interest on their return for up to five years after. This is a great way for them to reduce their taxes once they start earning more post-graduation.

Canada Training Credit

Launched in 2019, the Canada Training Credit is a refundable tax credit that accumulates at a rate of $250 a year up to a $5,000 lifetime amount. Your child will be eligible for the credit if they:

1. Are over 25 years old;
2. Are a resident of Canada throughout the year;
3. Have at least $10,000 of income from working or maternity/paternity benefits; and,
4. Have a net income below $150,000

If they meet his criteria, they are able claim the credit, which is the lesser of: 

• Half the eligible tuition and fees paid for the year; or,
• The student’s Canada training credit limit for the tax year

Everyone’s tax situation is different, and when it comes to private wealth management, sometimes tax issues can become dizzyingly complex. If you’re ready to close out or withdraw from an RESP, contact your DMCL advisor—they’ll be happy to use their knowledge and experience to craft a strategy that best fits you and your family’s needs.