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.
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 For starters, contributions, which were not tax deductible when made to an RESP, can generally be withdrawn tax free when the student attends post-secondary education.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.
For example, let’s say Harvey contributed $2,500 annually toward his son
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