Cut taxes owed to CRA by checking RESP withdrawal strategy in December

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Most Canadians likely associate the month of April with taxes, but it’s actually the month of December that should get all the attention.

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This is especially true if you’re a post-secondary student and currently the beneficiary of a registered education savings plan (RESP), or the parent of someone who is. That’s because if you’re strategic each year in the timing and amounts of your RESP withdrawals, you may be able to get all the funds out of the plan tax free. This is true even for larger plans, given the new guidance from the Canada Revenue Agency on what is considered a “reasonable” expense for educational purposes.

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Before reviewing my end-of-year RESP withdrawal strategy as well as the new CRA guidance, let’s briefly recap the RESP basics. An RESP is a tax-deferred savings plan that allows parents (or others) to contribute up to $50,000 per child while saving 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 to the plan.

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Contributions made to an RESP, which were not tax-deductible when contributed, can generally be withdrawn tax free when it comes time for postsecondary education. These are called “refund of contributions,” or ROCs. If not withdrawn for education, however, CESGs may need to be repaid.

Any other funds coming out of the plan for post-secondary education are referred to as “educational assistance payments,” or EAPs. This includes the income, gains and CESGs in the RESP. These are taxable when paid out to the student, who may end up paying little or no tax based on the availability of various tax credits and whether they had other income in the year.

At first glance, it might seem attractive to only withdraw ROCs, since they are simply non-taxable, if the goal is to minimize the family’s taxes throughout the entire course of the kids’ studies, but it’s probably better to create some income each year in the form of EAPs to fully utilize the student’s annual basic personal amount (BPA) and, potentially, other available credits.

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The enhanced federal BPA for 2022 is $14,398 (increasing to $15,000 in 2023). That means a student can have taxable income from all sources up to this amount before paying any federal tax.

December, therefore, is the ideal time for post-secondary students to take a look at their total estimated 2022 income, whether it be from a part-time job, a summer job or even an investment account. They can then use this information to determine how much in EAPs to receive before the end of the year, taking into account the enhanced basic personal amount and the tuition tax credit, as well as any other credits the student may be entitled to such as donation, medical expense or disability tax credits.

For example, a student who had zero income in 2022 could withdraw approximately $21,000 in EAPs with no federal tax by claiming the 2022 enhanced federal BPA of $14,398 and assuming they paid undergrad Canadian tuition fees of about $6,800 (the current average), which are eligible for the federal tuition tax credit.

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In most provinces, the provincial tax would also be zero, since students can claim a non-refundable provincial BPA, along with provincial tuition tax credits in all provinces other than Alberta, Saskatchewan and Ontario.

Alternatively, the student may only wish to take EAPs up to the federal BPA of $14,398, allowing the tuition to be transferred to a (grand)parent, spouse or partner (up to the $5,000 maximum transfer limit).

That said, there is no requirement that the money taken out of the RESP be specifically used towards the actual strict cost of education, such as tuition, books, etc. As long as the student is enrolled in a qualifying post-secondary program, “reasonable” EAPs can be paid to the student and the student can then choose to use the funds to pay for rent, food or any other expense that assists the student in furthering their post-secondary level education.

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For 2022, the CRA allows each beneficiary of an RESP to receive up to $25,268 ($26,860 in 2023) in EAPs without having to demonstrate to the RESP provider whether such a withdrawal request is reasonable. Given this limit, the student could then receive an additional $4,268 on top of $21,000 in EAPs as discussed above, and pay only minimal tax on this EAP, at marginal rates ranging from 20 per cent (Ontario) to 27.5 per cent (Quebec), if the student’s total 2022 income stays in the lowest provincial bracket.

If, however, the RESP is quite large or the student’s spending needs exceed this annual EAP threshold, the RESP provider must determine the reasonableness of the expenses and can do so by asking for additional information and documentation, including receipts.

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Last month, for the first time ever, the CRA provided a list of what it thinks are reasonable and unreasonable expenses. Reasonable expenses include: tuition, course materials, textbooks, student fees; moving expenses to and from school; rent and utilities; a computer/laptop and cellphone; internet and phone bills; basic personal needs while at school, including toiletries, clothing and food; “basic” furniture and housing needs, such as bedding, towels, plates and cutlery; transportation to move in and out from school and during official school breaks; local transportation costs while at school, and even the purchase of a car, if it is in the student’s name and used to transport the student to and from school and school-related activities.

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The CRA’s list of unreasonable expenses include: trips for family members to visit the student; arts, culture and entertainment, such as museums, fine dining, movies, plays, sporting events, concerts and festivals; personal care, like hair, spa and wellness treatments; travel unrelated to school, such as vacations; and a down payment on a home.

At the end of the day, however, it’s up to RESP providers, which have the ultimate responsibility for issuing EAPs, to determine what they consider to be reasonable, and they have the authority to be more restrictive than what’s listed in the CRA’s newest guidelines.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. [email protected]

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