If your parents set up a Registered Education Savings Plan (RESP) for you when you were younger, don’t be alarmed when you see income from your withdrawals on your tax return.
There are two kinds of withdrawals that can be made, one of which is not taxable, and the other is taxable to the student. The non-taxable portion is called a Post-Secondary Education (PSE) withdrawal which consists of the original contributions by the RESP contributor. The taxable portion is referred to as the Education Assistance Payment (EAP) which consists of government grants and income earned from the contributions. Proof of enrollment is required for an EAP and there is a limit of $8K for the first 13-week enrollment period if the student is enrolled in full-time post-secondary studies or $4K for part-time studies. These limits are effective March 28, 2023, and subject to the terms of your plan which may need to be amended by the issuers to allow for an EAP above $5K for full-time students or $2.5K for part-time students.
If a student does not have other sources of income, the tax on EAPs will be sheltered by the basic personal and tuition credits. However, many students at the University of Waterloo have co-op work terms or part-time jobs which may utilize those credits and cause the EAPs to be taxed. The amount that would be taxed would be relatively small presuming the student is in a low tax bracket. RESP withdrawals should be made to maximize the use of available tax credits. It is important to note that all EAP withdrawals should be made within at least six months of finishing post-secondary education to avoid complications.
- Steven, Young Tax Professional