School’s out: What happens to your RESP if your child doesn’t go to school?

Soon after Ellie was born, Melanie opened a Registered Education Savings Plan (RESP) and began investing for her daughter’s education. Over the years, Melanie contributed a total of $50,000 to the plan. She also received $7,200 CESG (Canada Education Savings Grant) matching contributions into the plan. After enjoying moderate investment success, the value of the plan reached $82,200. However, Ellie, now age 25, is happy with her current job and is certain she will not pursue postsecondary education. As such, Melanie has decided to collapse the RESP. What happens to the money in the plan?

Many Canadian parents and grandparents plan to cover at least some portion of costs related to their child’s/grandchild’s post-secondary education. This typically involves contributing to an RESP. Postsecondary education, such as college or university, can help open the door to a variety of career options, higher earnings potential and rewarding occupations. But there’s no guarantee that a child will want to pursue higher education. So what happens if they don’t? More precisely, what happens to the money inside your RESP if your child decides not to pursue a qualifying postsecondary education program?

Before we get into those specifics, let’s first discuss the basics of Registered Education Savings Plans.

ABCs of RESPs

An RESP is an account, created specifically to help parents, grandparents and others save for a child’s postsecondary education. Contributions to an RESP are not tax deductible. However, eligible RESP contributions can earn a matching 20 percent contribution from the Government of Canada via the Canada Education Savings Grant (CESG). Inside an RESP, all investment returns — interest, dividends and capital gains — enjoy tax-sheltered growth. There is no annual limit on RESP contributions, however, there is a lifetime RESP contribution limit of $50,000 per child, and a lifetime CESG limit of $7,200 for each child.

What happens to your RESP if the beneficiary doesn’t pursue postsecondary education?

The money in an RESP comes primarily from three different sources – your original contributions, matching CESG contributions from the government and investment growth. The distinction between these sources is important because each is treated differently upon withdrawal. If a child doesn’t attend a qualifying postsecondary education program, money can be withdrawn from your RESP as follows:

Contributions – You can withdraw the money you’ve contributed over the years with no tax consequence. Unlike Registered Retirement Saving Plan (RRSP) contributions, RESP contributions are not tax deductible. As such, there are no taxes owing when those contributions are withdrawn.

CESG – You must return this portion to the Government of Canada. Grants are paid by the government to encourage higher education, and as such, if your child doesn’t attend a qualifying educational program, all grant amounts paid into the RESP must be repaid to the government.

Investment growth – This portion, when withdrawn, is known as an Accumulated Income Payment (AIP), and is taxable at your marginal tax rate plus an additional 20% tax. However, the additional 20% tax can potentially be avoided. If you have RRSP contribution room available, you can transfer up to $50,000 AIP from the RESP to your RRSP with no immediate tax consequence. More information on this transfer is available on the Government of Canada website.

What about Ellie’s RESP?

Melanie will close the RESP because her daughter Ellie has decided not to attend postsecondary school. Let’s consider the three amounts separately: $50,000 in contributions, $7,200 in CESG from the Government of Canada and $25,000 in investment growth.

Melanie’s contributions ($50,000) – Melanie can simply withdraw the $50,000 that she had contributed to the plan. There are no tax consequences to this portion of the withdrawal.

CESG ($7,200) – The $7,200 CESG paid into the plan must be returned to the Government of Canada

Investment growth ($25,000) – If Melanie has sufficient RRSP contribution room available, she has the option to transfer the investment growth into her RRSP with no immediate tax consequence. (Note that tax will be paid when the money is ultimately withdrawn from the RRSP). If she does not have sufficient RRSP contribution room available, she can receive this amount as an AIP, subject to taxation at her marginal tax rate, plus an additional 20% tax.

Additional considerations

A child who isn’t interested in postsecondary education today may decide to pursue a program of interest in the future. An RESP can remain open for a total of 36 years.

If you have more than one child, and one child doesn’t pursue postsecondary education but another does, it may be possible to transfer the RESP contributions and grants to the child who pursues postsecondary education. Where a beneficiary is part of a family RESP with more than one beneficiary, if one child doesn’t withdraw his or her government grants, they may potentially be transferred to another beneficiary of the plan, provided the $7,200 CESG lifetime limit per beneficiary is not exceeded. Any excess amount remaining must be repaid to the federal government. Note that, while the lifetime $7,200 CESG limit per child still applies, the lifetime $50,000 contribution limit does not apply in this case. That is, in a family RESP plan with multiple beneficiaries, if one child doesn't attend postsecondary school, the original contributions made in that child's name can be allocated to the remaining beneficiary(ies) even if it results in more than $50,000 being contributed for a single beneficiary.

Furthermore, even if your son or daughter isn’t interested in college or university, there are many other qualifying schools and programs, such as trade schools, hair stylist programs, CEGEPs (Quebec), and other institutions certified by the Minister of Employment and Social Development. For a complete list of qualifying educational institutions, please visit the Government of Canada website.

Bottom line

RESPs are great vehicles for education savings, but keep in mind that an RESP is simply an account – not an investment, and not a comprehensive education planning strategy. What type of RESP should you open, how much should you contribute, what invest­ments should you purchase, and what should you do if your child doesn’t attend school? These are just some of the important issues we can help you address. For more information, contact us today.