Do you ever have a legal obligation to pay RESP money back to your parents?

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Barbara wonders what a time-out from her studies might mean for her Registered Education Savings Plan, and if the withdrawals are truly hers to keep.

Do you ever have a legal obligation to pay RESP money back to your parents?

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Q. I’m planning to take a break from university until I can move into my own place and support myself through school. I’ve already taken three years of classes, which I paid for through a mixture of loans, grants, and my Registered Education Savings Plan—which my parents set up and contributed to while I was growing up. I know it’s legal for them to dictate what I take from the RESP, but is there any situation in which I would be legally required to pay that money back to them?
–Barbara

A. Great question, Barbara. Because your parents are the subscribers of the RESP—meaning they set up the account for you and made the contributions—the money is legally theirs until they pass it over to you, the beneficiary. But once the money is in your hands it is legally yours and you don’t have to pay it back to them.

There are, however, a few other things you and your parents should keep in mind about your RESP funds, especially given your plan to pause your studies.

As you may recall, during the first semester of your first year of university, you were allowed to draw a maximum of $5,000 in Educational Assistance Payments (EAP), which includes the government grants paid into the RESP and any interest or investment growth on the RESP savings. As the beneficiary, those EAP withdrawals become part of your annual taxable income.

You were also allowed to take out whatever amount you wanted from the available Post-Secondary Education (PSE) funds, or the principal contributions your parents made to the plan. PSE withdrawals are not taxable, because your parents already paid taxes on that money when they earned it.

After the first semester, any amount and combination of EAP and PSE withdrawals are allowed, so long as you have proof of enrolment in an eligible post-secondary institution and program.  But if you leave school—as you are planning to do—and more than a year passes before you return, then once again you will be limited to $5,000 of EAP in the first semester back.

Furthermore, it’s important to understand that the maximum lifetime of an RESP account is 35 years. At that time, the plan must be closed and whatever amount of money is left is dispersed as follows:

  • The grant is returned to the government
  • The principal is returned to the subscribers (your parents), and
  • The growth is returned to the subscribers (your parents) as taxable income, along with a 20% penalty.

Therefore, it’s in your parents’ best interest to withdraw all the money from the RESP while you qualify for withdrawals and before the plan expires after 35 years.

If you leave school and there’s a possibility you might not return, your parents may want to consider withdrawing all the RESP funds now, after taking the following into consideration:  

  • What will the RESP taxable income be?
  • What is the beneficiary’s (your) anticipated taxable income for the year?
  • Where will they put the money after they withdraw it from the RESP?

They will have to weigh the benefit of getting the funds out of the RESP against the amount of tax you will have to pay as the beneficiary.  Hopefully, they will compensate you for any additional income tax you owe.

Once the money is out of the RESP, your parents should deposit the money into their Tax-Free Savings Account (TFSA), where the funds can grow tax free and allow for a potential tax-free transfer to you.  If they don’t have available TFSA contribution room, they could add some or all the money to your TFSA, depending on your available room.  However, if they do that, the money becomes legally yours and you don’t have to pay it back to them.

Barbara, I wish you the best of luck with whatever you decide to do, and I hope you and your parents will work together on a withdrawal strategy to maximize the value of the RESP. 

Allan Norman, M.Sc., CFP, CIM, RWM, is both a fee only certified financial planner with Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or [email protected]. This commentary is provided as a general source of information and is intended for Canadian residents only.

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