Tuition is on the rise, and fast! On average Canadian students paid 3.3%(i) more for tuition for the 2014/15 academic year than the previous year. Not only is the tuition ticket increasing so are compulsory fees for athletic centres, health services, and associations (an average of $821 per student in 2014/15 compared to $799 a year earlier)(ii) .
RESP’s are often recommended by financial planners and advisors as vehicles in which to best save for your child’s education. However, when it comes time to actually take money out, there are a few administrative hurdles to note.
Money withdrawn for qualifying post-secondary education from an RESP leaves your RESP two ways
- EAP’s “Education Assistance Payments”: These are paid to the student to help pay for their post-secondary education. Money received as EAPs include Canadian Education Savings Grants, as well as any investment income earned. EAPs are taxable, but in the students hand.
- PSE’s “Post-Secondary Education Payments”: These are payments contributed by the subscriber (usually parent, or grandparent) and may be withdrawn from the plan tax free.
It is up to the plan subscriber to request which type of payment (EAP or PSE) to take out of the RESP and when. Take note, EAP withdrawals come with timing restrictions – during the first 13 weeks of post-secondary education only $5,000 (2,500 for part-time students) of EAP can be withdrawn. Furthermore, in order to take out an EAP there are specific requirements mandated by financial institutions holding the RESPs.
Institutions commonly require proof of enrollment at a qualifying post-secondary institution prior to releasing any funds. Individuals often think that an acceptance letter qualifies, however as it does not indicate the student is enrolled in a qualified program it will generally be rejected by the relinquishing institution.
When choosing RESP withdrawals (either EAP or PSE) consider the level of taxable income expected by the student. Often drawing down EAP payments first is beneficial. EAPs are taxed in the student’s hands and presuming a small level of student income, there should be sufficient personal tax credits and tuition deductions to offset any tax.
It is also is important to manage the level of EAP payments annually so that
- the student does not incur unnecessary tax, and
- to ensure that the $7,200 CESG grant per beneficiary maximum has not been met. Prior to requesting an EAP ask your financial institution how much grant money your child has received. If they have received, more than $7,200 in grants, the excess will have to be repaid. This becomes especially important to monitor when you have one RESP for multiple beneficiaries.
Whether your child is starting grade 1 or university it is important to plan ahead and be aware of the increasing costs of post-secondary education. By leveraging the tools available to you this will help to maximize government assistance and finance your child’s future.
(i)“University Tuition Fees”, September 11, 2014, StatsCAN,http://www.statcan.gc.ca/daily-quotidien/140911/dq140911b-eng.htm
(ii)“University Tuition Fees”, September 11, 2014, StatsCAN,http://www.statcan.gc.ca/daily-quotidien/140911/dq140911b-eng.htm