It’s time to get schooled on RESPs, CESGs, EAPs and AIPs – Part 2

Financial education

You’ve spent years accumulating that RESP nest egg for your darling little Einstein. Now it’s time for him or her to fly the coop – what to do?

In part one of this article, I spoke about Registered Education Savings Plans (RESPs) more broadly, and touched on Canada Education Savings Grants (CESGs). In this installment, we’ll take a look at the ABCs of EAPs (Educational Assistance Payments) and Accumulated Income Payments (AIPs).

Payments from an RESP

Sorting out the various tax implications when withdrawing funds from your RESP can be a little overwhelming. Your Financial Planner can guide you on the best way to do this, taking your own personal situation into account. Here are some discussion points you may want to cover with him or her:

1. Educational assistance payments (EAP)
2. Payment to a designated educational institution in Canada
3. Repayment limits on EAPs
4. Accumulated income payments (AIP)
5. Refund of contributions to the subscriber or to the beneficiary
6. Changing beneficiaries

1. Educational Assistance Payments (EAPs)

An educational assistance payment is the amount paid to a beneficiary from an RESP to help finance the cost of post-secondary education. An EAP consists of the Canada Education Savings Grant (CESG) and the earnings on the money saved in the RESP. Note: the student needs to include the EAPs as income on his or her income tax and benefit return for the year he or she receives them. Also, a beneficiary must be a resident of Canada in order to receive the CESG as part of the EAP.

The promoter (typically a bank or recognized financial institution) usually pays the contributions, and the income earned on those contributions, to the beneficiaries. They can only payout an EAP if one of the following applies:
– The student is enrolled in a qualifying educational program. This includes students attending a post-secondary educational institution and those enrolled in distance education courses, such as correspondence courses, provided by such institutions; or

– The student is at least 16 years of age and is enrolled in a specified educational program.

Students can receive EAPs for up to six months after ceasing enrolment, provided that the payments would have qualified as EAPs if the payments had been made immediately before his or her enrolment ceased.

A qualifying educational program is an educational program at post-secondary school level that lasts at least three consecutive weeks, and requires a student to spend no less than 10 hours per-week on courses or work in the program.
A specified educational program is a program at post-secondary school level that lasts at least three consecutive weeks, and requires a student to spend no less than 12 hours per-month on courses in the program.

2. Payment to a designated educational institution in Canada

The following qualify as post-secondary educational institutions that your RESP funds can be used for to pay real expenses associated with full-time or part-time studies:

– A university, college, or other designated educational institution in Canada

– An educational institution in Canada certified by Employment and Social Development Canada (ESDC) as offering non-credit courses that develop or improve skills in an occupation

– A university outside of Canada that has courses at the post-secondary school level, at which the student was enrolled on a full-time basis in a course of not less than three consecutive weeks

– A university, college or other educational institution outside of Canada that has courses at post-secondary school level, at which a student was enrolled in a course of not less than 13 consecutive weeks

3. Repayment limits on EAPs

The maximum amount of EAPs that can be made to a student as soon as he or she qualifies to receive them is:

a. For studies in a qualifying educational program: $5,000 for the first 13 consecutive weeks in such a program. After the student has completed the 13 consecutive weeks, there is no limit on the amount of EAPs that can be paid if the student continues to qualify to receive them. If there is a 12-month period in which the student is not enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum applies again; or

b. For studies in a specified educational program: $2,500 for the 13-week period whether or not the student is enrolled in such a program throughout that 13-week period.

Subject to the terms and conditions of the RESP, you can supplement the $5,000 or $2,500 EAP by paying a portion of the contributions tax-free to the beneficiary.

Employment and Social Development Canada may, on a case-by-case basis, approve an EAP amount of more than the above limit if the cost of tuition plus related expenses for a particular program is substantially higher than the average.

4. Accumulated Income Payments (AIPs)

AIPs are amounts usually paid to the subscriber, drawn from the money earned from contributions and/or grants paid into an RESP. An AIP does not include:

– Educational Assistance Payments (EAPs)
– Payments to a designated educational institution in Canada
– The refund of contributions to the subscriber or to the beneficiary
– Transfers to another RESP
– Repayments of CESGs

AIPs cannot be made as a single joint payment to separate subscribers.

5. Refund of contributions to the subscriber or the beneficiary

Your contributions can be returned either to you or your child tax-free at any time. They can also be transferred to your RRSP if there is contribution room available.

6. Changing the beneficiary

One of the main benefits of a family plan is that if one child does not go to a post-secondary institution, a sibling can take advantage of the unused contributions. When a child becomes a new beneficiary in place of a former beneficiary, the contributions for the former beneficiary are treated as if they had been made for the new beneficiary on the date they were originally made.

If the new beneficiary already has an RESP, this may create an excess contribution. The exception to the rule ensures that the contribution history of your first child is not added to the contribution history of his or her sibling when determining whether the younger child’s lifetime contribution limit has been exceeded. This applies if the new beneficiary is under 21 years of age, and the parent of the new beneficiary was a parent of the former beneficiary.

For additional information on RESPs, read 4 Rules to consider before opening an RESP.

Dave Gillan has over 28 years’ experience in the financial services sector, specializing in tax and estate planning. He also has particular expertise in providing financial literacy education programs to companies and executives in the resource sector.

Source: Revenue Canada. (2016, January 12). Registered Education Savings Plans (RESPs). Retrieved from http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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