RESPs and taxes: Understanding the Tax Impact of Your Education Savings
Here are the key points to understand how taxation works for your Registered Education Savings Plan (RESP), explained simply and clearly.
RESP contributions: contributions to an RESP are not tax-deductible (unlike RRSPs).
Tax-sheltered growth: investment income and government grants grow tax-free as long as the funds remain in the RESP, supporting optimal medium- and long-term growth.
Withdrawals for education:
- Contributions are withdrawn tax-free because they were made with after-tax income.
- Grants and investment income – called Educational Assistance Payments (EAPs) – are taxable for the beneficiary in the year they are withdrawn, based on their tax rate.
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Are RESP contributions tax-deductible?
Short answer: no. RESP contributions are not tax-deductible and do not reduce your taxable income, unlike contributions to a Registered Retirement Savings Plan (RRSP). RESP investments, on the other hand, benefit from tax-sheltered growth while the funds remain in the account.
What truly distinguishes education savings are the generous grants attached to them. Contributions may be increased by 30% to 60%1 thanks to government assistance, up to a maximum of $12,8002 per child in Quebec.
| Program | Bonus | Maximum (per child) |
|---|---|---|
| Canada Education Savings Grant (CESG) | 20% base. an additional 10% or 20% for eligible families. |
$7,200 for life. $500 per base year. Up to $100 more for eligible families. |
| Quebec Education Savings Incentive (QESI) | $10 base. additional 5% or 10% for eligible families. |
$3,600 for life. $250 per base year. Up to $50 more per eligible family. |
| Canada Learning Bond (CLB) | No contribution required. | $2,000 for life. $500 for the first year. $100 each subsequent year. |
Limits and deadlines: optimize your tax strategy
Managing your RESP contributions involves two key elements: meeting the deadlines that determine eligibility for grants and avoiding exceeding the limits that result in penalties. By keeping these rules in mind, you can maximize the real impact of every dollar you invest in your child's education.
Is there a deadline for contributing to an RESP?
You can contribute to your RESP at any time, but to take full advantage of government grants for the current year, you must do so before December 31. Contributing before the end of the year allows you to optimize your overall tax strategy. However, keep in mind that these grants are available until the end of the year in which your beneficiary turns 17, and you can only recover one year of unused entitlements at a time
Find out how to take full advantage of your education savings now.
RESP contribution limits and tax penalties
The RESP has a lifetime contribution limit of $50,000 per beneficiary. It is therefore important to keep track of your payments—especially if you have multiple accounts open for the same child—so that you do not exceed this limit. If the limit is exceeded, a 1% monthly tax penalty applies to the excess amount until it is withdrawn. In such cases, you will need to file form T1E-OVP to report the excess contributions.
Tax-sheltered growth: a key advantage of RESPs
One of the main benefits of an RESP is tax-sheltered growth. As long as the money remains in the plan, the investment returns generated are not taxable. RESP's tax-free status during the accumulation phase allows your savings to grow more efficiently year after year.
Are RESP withdrawals taxable?
Taxation for subscribers: the capital
Your contributions – the capital you deposited – are never taxable when withdrawn for the beneficiary’s education, because the funds were already taxed at source. You can therefore recover your savings without any tax impact.
In fact, there's no rush to get your capital out of the RESP. You can withdraw your money strategically and choose how to use it afterwards. For example, you could :
- give the funds to your child to help pay for education or start their adult life;
- transfer them to your RRSP and benefit from a tax deduction;
- use them for other personal or family projects.
Taxation for beneficiaries: EAPs
Government grants and investment income paid as Educational Assistance Payments (EAPs) are taxable for the student. They must be included in the student’s tax return in the year they are received.
Planning RESP withdrawals
By withdrawing only the amounts your child actually needs, you can reduce their tax burden and allow the remaining savings to continue growing tax-free. Once your beneficiary has enrolled in an eligible educational institution, it is worth planning your withdrawal strategy carefully.
How should RESP withdrawals be reported on a tax return?
The student must include Educational Assistance Payments (EAPs) on their tax return for the year they were received. A tax slip is issued for this purpose, which can be downloaded or sent by mail, and must be included with their tax return. Since students generally have lower incomes while in school, the tax rate and tax impact are often limited.
To make things easier, check out our tax preparation tool: a handy checklist to help you remember everything when filing your return.
If your child is not pursuing studies, what happens to their EAPs?
If your beneficiary does not enroll in eligible post-secondary studies or stops studying, Education Assistance Payments (EAPs) cannot be paid. That said, there's no rush: an RESP can remain open for up to 35 years. This gives you time to consider your options.
If you have other younger children, you can also transfer the accumulated funds to them without any tax implications3. If changing the beneficiary is not possible, the RESP will be closed or reorganized, and the tax rules will change. Your contributions can then be recovered tax-free, but government grants will have to be repaid to the federal and provincial governments.
As for the income accumulated in the plan, it can be withdrawn in the form of an accumulated income payment (AIP).
Accumulated income payment (AIP) at a glance
An accumulated income payment (AIP) is an amount paid to the subscriber of an education savings account. It includes earnings received from contributions and grants paid into the RESP.
- If you have accumulated contribution room in your RRSP, you can transfer your AIP to your RRSP and recover all your returns tax-free.
- As a last resort, you can cash out your AIP, but it will be subject to two taxes: regular income tax (based on your marginal tax rate), and a special tax of 12% in Quebec and 20% elsewhere in Canada.
RESP tax FAQs
No, an RESP does not reduce your taxable income. Contributions to an RESP are not tax deductible, unlike RRSPs. They do, however, entitle you to government grants, within the annual limits set by federal and provincial programs.
The contributions you have made can be withdrawn tax-free, since they have already been taxed at source. All is not lost: you have a few options. If you have other children, you can transfer the grants and earnings to their respective RESPs, subject to the maximum allowances.
Otherwise, the grants must be returned to the government, while the accumulated income can be transferred to an RRSP or withdrawn as an accumulated income payment (AIP). This will then be taxable and may be subject to additional tax, with some exceptions.
Learn more in our article "My child is leaving school: what should I do with their RESP?“.
Yes, you can transfer RESP income to an RRSP if your child is not pursuing post-secondary education, under certain conditions. Up to $50,000 in accumulated income can be transferred to the RRSP of the person who subscribes – or their spouse – provided they have available contribution room. This transfer avoids the additional tax normally applicable to accumulated income payments (AIP).
It is not the subscriber, but the beneficiary who pays the tax when withdrawing from the RESP. Grants and income are taxable for the year in which the educational assistance payments (EAPs) are withdrawn. Since income is often lower during studies, the tax impact is generally limited.
The student beneficiary of the RESP will receive a T4A tax slip and must include their education assistance payments (EAPs) – i.e., withdrawals of returns and grants – on their tax return. The person who contributes to the RESP does not need to report the withdrawal of their contributions, as they are tax-free.
Yes, the RESP contribution limit is $50,000 per child for their lifetime. Excess amounts are subject to a tax penalty of 1% per month until they are withdrawn.
There's no specific deadline to contribute to your RESP, but it's best to invest before December 31 to maximize government grants for the current year. Grants can be paid until the end of the year in which your child turns 17, under certain conditions.
1. Canada Education Savings Grant (CESG) from 20% to 40% and Quebec Education Savings Incentive (QESI) from 10% to 20%, according to adjusted family net income. Certain conditions apply. See our prospectus at Kaleido.ca.
2. The lifetime maximum per beneficiary is $7,200 for the Canada Education Savings Grant (CESG) and $3,600 for the Quebec Education Savings Incentive (QESI). The Canada Learning Bond (CLB) can reach $2000 per beneficiary for a child born after December 31, 2003, whose family is financially eligible. Certain conditions apply. See our prospectus at Kaleido.ca.
3. Certain conditions apply. See our prospectus at Kaleido.ca.