Feds boost limit on allowable EAP withdrawals from RESPs

The federal government is proposing to allow withdrawals of up to $8,000 in educational assistance payments (EAPs) from an RESP for beneficiaries enrolled as full-time students during the first 13 weeks of enrolment, and up to $4,000 for part-time students.

EAPs represent the total amount of government grants and investment income in an RESP.

Currently, the rules governing RESPs impose a $5,000 limit on EAP withdrawals for full-time students for the first 13 weeks of enrolment and $2,500 for part-time students.

The government proposed the change in the 2023 federal budget, tabled Tuesday, to reflect the fact that the cost of post-secondary education has risen in recent years. The proposed change would be effective as of budget day.

“In a typical year, nearly 500,000 students withdraw funds from an RESP to support their education. However, the withdrawal limits for RESPs have not increased in 25 years,” the budget stated. The proposed change would “improve these plans for students and help them afford the costs of pursuing an education.”

RESP limits on EAP withdrawals are meant to discourage circumstances in which an individual might be tempted to enroll for only a short period to access funds in the RESP without actually intending to pursue post-secondary education, said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth.

However, the current limits on EAP withdrawals were “woefully inadequate,” he said.

From an ideal tax-planning perspective, students will aim to withdraw all RESP funds tax-free, Golombek said. While the contributions can be taken out tax-free, the grants and EAPs are taxable to the student. The student can use their basic personal amount, which is $15,000 in 2023, as well as federal tuition credits to generally eliminate all of their federal tax.

As a result, it’s often beneficial for the student to withdraw more than $5,000 in the first semester in order to take out their funds tax free, Golombek said.

The government also proposed changes to RESP rules to allow divorced and separated parents to open joint RESPs for their children, or to move an existing joint RESP to another provider.

Currently, only spouses or common common-law partners can jointly enter into an agreement with an RESP promoter to open an RESP. Parents who opened a joint RESP prior to their divorce or separation can maintain this plan afterward, but are unable to open a new joint RESP with a different promoter.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.