When clients start saving for their child’s post-secondary education expenses in an RESP, it’s impossible to predict how much it will cost, how long the program will last or if the child will even pursue education after high school.
It gets even more complicated if the student uses the RESP but doesn’t deplete it. Some of the remaining growth value of the investments can be subject to a 20% penalty on top of the parents’ marginal tax rate. Advisors say decumulation planning that involves the child and strategic withdrawals according to RESP rules are crucial to minimizing tax.
When a student begins post-secondary education, RESP contributions can be accessed tax-free as post-secondary education (PSE) withdrawals. Investment growth as well as government grants, such as the Canada Education Savings Grant and Canada Learning Bond can be withdrawn as educational assistance payments (EAP), explains Mark Henein, a senior wealth advisor and portfolio manager with Scotia McLeod in Mississauga, Ont.
Parents can track all of this by asking their bank or calling the ESDC.
Families should prioritize making EAPs, said Wilmot George, vice-president and head of tax and retirement planning at CI Global Asset Management in Toronto. Any grant funds that remain at the end of the student’s enrolment must be returned to the government and any investment growth remaining is subject to a penalty, he said. During the first 13 weeks of enrolment, full-time students can withdraw up to $8,000 in EAPs.
| Fund | Withdrawal type | Taxation while in school | Treatment after graduation |
| Original contribution | PSE | Not taxed | Not taxed |
| Growth | EAP | At the student’s bracket | Taxed at the parent’s bracket plus 20% penalty |
| Grants | Returned to the government |
The $8,000 limit only applies to the EAP, said Jeffrey Wu, president and financial planner at Unison Financial Solutions Inc. with Sun Life in Montreal, so families can still make PSE withdrawals if there’s a higher upfront cost.
Typically, students have low or no employment income, so they can make additional EAPs up to their basic personal amount after the first 13 weeks and every subsequent year, and pay zero income tax, Wu said.
Although there’s no EAP limit from the 14th week onwards, the student will need to prove that they need the funds for eligible expenses if annual EAP withdrawals exceed $28,881 in 2025. The government adjusts the cap every year.
Planning together
Different families have different views of work ethic and how to reward it, so it’s important to involve the student in the planning process, said Aaron Hector, a private wealth advisor and financial planner with CWB Wealth Management in Calgary. For example, he had one client who would only pay for the first time a child enrolled in a class to motivate them to pass on their first try.
If there’s a large balance in the RESP, the student can make EAPs up to the annual threshold with no questions asked, Hector said. If the client wants to make additional EAPs, the CRA deems a car a reasonable expense if it is titled in the student’s name and used to travel to and from school and for school-related activities. Other reasonable expenses include a laptop, a phone and basic furniture.
The child could use any excess amount for a tax-deductible first home savings account (FHSA) contribution or a TFSA contribution, Wu said. Opening these accounts for the student also encourages healthy saving habits.
Even if there is tax payable on EAPs, it is taxed in the student’s bracket, which is usually lower than their parents’ marginal tax rate, Henein said.
However, not every child pursues post-secondary education. If they have siblings who do, they can share the growth portion in a family RESP and any grants up to the $7,200 lifetime maximum per person, George said. Any government grants above that amount must be returned.
In case children drop out or don’t attend post-secondary school at all, remaining grants must be returned to the government, and remaining growth is taxed at the parents’ marginal tax rate plus a 20% penalty.
“If they feel their student may not finish their education and they may never go back to school, we would want to take out the government grant and the investment income earned right away,” Henein said.
Families can avoid the penalty by contributing up to $50,000 of the growth portion of the RESP to their RRSP, or roll it over to their child’s registered disability savings plan, provided there is room in the accounts, George said.
But an RESP can remain open for up to 35 years. Even if a child doesn’t go to school by age 21, families can leave the account open in case they pursue post-secondary education later, Henein said.
“Thirty-five years is a long time,” Hector said. “I would encourage people just to think that through and say, ‘Are we 100% sure that there’s never going to be a scenario where there’s some kind of an educational pursuit here?’”
This story has been updated to reflect the ways to track RESP contributions.
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