School’s out for­ever

How to avoid RESP penal­ties if your child quits uni­ver­sity

The Guardian (Charlottetown) - - BUSINESS - BY DAVID HODGES

Par­ents may dream of giv­ing their chil­dren the best pos­si­ble post-sec­ondary ed­u­ca­tion by set­ting up an RESP ac­count, but if your son or daugh­ter de­cides school is no longer in the cards, pre­pare for a big tax hit.

With lu­cra­tive gov­ern­ment grants and tax-shel­ter­ing ben­e­fits, a Reg­is­tered Ed­u­ca­tion Sav­ings Plan can play a sub­stan­tial role in help­ing save for fu­ture school­ing costs.

How­ever, par­ents must also brace for the pos­si­bil­ity that their child may quit college or uni­ver­sity early, or choose not to at­tend at all, leav­ing them on the hook for sig­nif­i­cant penal­ties if they col­lapse the RESP with­out us­ing it for its in­tended pur­pose.

While con­tri­bu­tions to an RESP are yours free and clear if you cash out an ac­count, fed­eral grant money goes back to the gov­ern­ment and any re­turns or in­ter­est earned will be taxed as in­come and sub­ject to an ad­di­tional 20 per cent of tax­a­tion.

If par­ents know one of their chil­dren won’t be at­tend­ing an ac­cred­ited post-sec­ondary ed­u­ca­tional in­sti­tu­tion, one op­tion for hold­ing onto more RESP-gen­er­ated in­come is to trans­fer it to a brother or sis­ter, says cer­ti­fied fi­nan­cial plan­ner An­nie Kvick.

“If one child doesn’t need it, then hope­fully there’s other sib­lings that can get a part of it,” says Kvick, who works with Money Coaches Canada in North Van­cou­ver, B.C.

While RESP funds can be trans­ferred if a sib­ling is part of the same fam­ily plan or in a dif­fer­ent in­di­vid­ual ac­count, par­ents must not ex­ceed the $7,200 life­time Canada Ed­u­ca­tion Sav­ings Grant limit per child. That means if the trans­ferred grant money plus any grant money the other sib­ling al­ready re­ceived tops $7,200, the ex­cess must be re­paid to the gov­ern­ment.

If trans­fer­ring RESP funds be­tween sib­lings isn’t an op­tion, there’s no way to hold onto grant money. But it is pos­si­ble to trans­fer any re­turns or in­ter­est earned within the RESP - known as the ac­cu­mu­lated in­come pay­ment, or AIP - into your or your spouse’s RRSP ac­count, says Tom Feigs, a Cal­gary-based cer­ti­fied fi­nan­cial plan­ner.

If there is RRSP room avail­able, the gov­ern­ment al­lows peo­ple to trans­fer up to $50,000 of AIP earn­ings tax-free, pro­vided the RESP ac­count has been open at least 10 years and all ben­e­fi­cia­ries of the ac­count are at least 21 and not en­rolled in post-sec­ondary stud­ies.

Rolling the money over into an RRSP also avoids the ad­di­tional 20 per cent penalty tax.

If peo­ple don’t have con­tri­bu­tion room avail­able in their RRSPs, Feigs says a strat­egy for work­ing par­ents is to de­lay col­laps­ing the RESP for a year or two while they build up more RRSP con­tri­bu­tion room.

An­other op­tion is rolling over in­vest­ment earn­ings from an RESP to a Reg­is­tered Dis­abil­ity Sav­ings Plan, pro­vided cer­tain re­quire­ments are met.

Feigs says many peo­ple don’t re­al­ize that dur­ing the first 13 weeks of en­rol­ment at an ac­cred­ited post-sec­ondary school you’re lim­ited to $5,000 of with­drawals, but after that there’s no lim­its as to how much you can take out and for what pur­pose.

In the case of a child who, for in­stance, plans to aban­don post-sec­ondary ed­u­ca­tion, leav­ing be­hind un­used RESP in­come, Feigs’s ad­vice is to take out all of the money im­me­di­ately if it is pos­si­ble.

“It doesn’t have to be a nor­mal­ized or level with­drawal process,” says Feigs.

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