Contributions to an RESP are not tax deductible, while investment growth generated in the RESP is taxable when withdrawn.daoleduc/iStockPhoto / Getty Images
Many Canadians may not realize that an adult can open a registered education savings plan (RESP) for themselves.
While it’s true that they won’t be eligible for government grants, they can still benefit from growing contributions within the plan on a tax-deferred basis over a long period.
Considering that the lifetime contribution limit for an RESP is $50,000 per beneficiary and that, generally, an RESP can remain open for up to 35 years, an RESP could grow to a significant amount.
Withdrawals from the plan can then be used to enroll in an eligible educational program, which can include those offered by technical or trade schools, says Paul Thorne, director of advanced planning with Sun Life Financial.
“You don’t have to go into a four-year university degree,” he says.
But a client might well also ask: If I’ve already maximized my RRSP and TFSA contributions, could I open an RESP primarily as an additional way to build tax-deferred savings?
In theory, the answer is yes.
In practice, however, it’s difficult to benefit from the tax deferral without also having a real interest in pursuing post-secondary education, says Doug Carroll, tax and estate specialist at Aviso Wealth.
“You have to know, almost to a certainty, that you’re going to go [back to school] and that you’re willing to go through the hassle,” of opening an RESP for yourself, he says.
Designed for education
The rules governing RESPs generally discourage someone from using the account just to benefit from the tax deferral.
To begin with, contributions to an RESP are not tax-deductible, while investment growth generated in the RESP (but not contributions) is taxable when withdrawn.
However, the true cost is felt when someone opens an RESP for themselves and doesn’t eventually go back to school.
If the client doesn’t enroll in an eligible program, they’ll have to pay taxes on the investment growth generated in the plan – in the form of “accumulated income payments” (AIP) – at their regular marginal tax rate, plus an additional tax of 20 percentage points. That reduces or eliminates any tax benefit achieved through tax-deferred growth in the plan.
It’s also generally not possible to receive the AIP unless the RESP has been open for at least 10 years (short of asking the CRA for a waiver). The only other method of avoiding the 10-year requirement is giving the money to an educational institution.
Studying in retirement
If the client does enroll in post-secondary school, they avoid the 20 per cent additional tax.
The RESP provider will pay out “educational assistance payments” (EAP) – the growth in the plan plus any government grants – to the student client.
If the client is retired and not earning much other income, they could be subject to a lower tax rate on the EAP, representing another tax benefit of building savings via an RESP.
To be eligible for the EAP, the client must be enrolled in an educational program that meets certain minimum thresholds in terms of the number of weeks enrolled and the number of hours of work or instruction per week or month, depending on whether the program is full-time or part-time.
For full-time study, the RESP provider can pay out up to $8,000 in the EAP for the first 13 weeks of study, after which they can pay an amount up to a set limit for the year (in 2026, it’s $29,459) without having to ask the beneficiary to prove that their educational expenses are reasonable.
For part-time study, the EAP is limited to $4,000 for each period of 13 consecutive weeks of enrolment.
Mr. Carroll notes that, with a $4,000 limit for any 13-week period, it might take a long time for someone who is studying part-time to withdraw the EAP from an RESP that has generated significant growth.
Any investment growth left in the RESP after the client is no longer eligible to receive the EAP is paid out as the AIP – with the additional 20-per-cent tax.
However, if the client has RRSP contribution room, they may be able to transfer up to $50,000 of the AIP to their RRSP, avoid the additional taxes and claim a deduction.
Once an AIP has been paid out, the RESP must be closed by the end of February of the following year.
EAP eligibility
It’s worth noting that the rules governing the payment of the EAP only require that the RESP beneficiary be enrolled in an eligible educational program, not that they complete it. Thus, it might be possible for someone to enroll in a relatively low-cost, full-time post-secondary program to meet the conditions and receive the EAP.
However, because of the complexity of RESP rules and the potential negative consequences if someone doesn’t enroll in an eligible program, Mr. Carroll says most clients would be best served by maximizing their TFSA and RRSP contributions before considering opening an RESP for themselves.
Both TFSAs and RRSPs offer tax benefits that are easier to access, he says. The TFSA can be used to grow savings on a tax-sheltered basis that can be used to pay for any expense, including education, while the RRSP can be tapped to pay for education via the Lifelong Learning Plan.
Mr. Thorne also says he wouldn’t recommend clients enroll in a low-cost program just to access EAPs, saying it “sounds like a lot more work” compared to simply using an RESP for its intended purpose.
“Just because something’s technically possible doesn’t mean you should be planning to do that,” he says.