How are RESPs taxed?

Canada Life - Aug 30, 2023
One of the main benefits of an RESP is that it’s a tax-deferred savings plan; however, when it’s time to take the money out, there are some things to consider
save for your child’s post-secondary education

Are contributions to an RESP tax deductible?  

Unlike a Registered Retirement Savings Plan (RRSP), your direct contributions to an RESP are not tax-deductible. One of the benefits of an RESP is that the generated investment income (capital gains, dividends and interest) isn’t taxed while it remains in the plan.  

Are RESP withdrawals taxable?  

Once your child (the beneficiary) has completed high school and enrolled in post-secondary education, you’re able to start making withdrawals to pay for things like tuition, accommodation and supplies. 

If you withdraw government benefits like the Canada Education Savings Grant (CESG) or money that’s accumulated through interest on the account, this is known as Education Assistance Payment (EAP). Students who receive EAPs must claim it as income on their tax return. 

Your RESP provider will send you a T4A tax slip under the student’s name for these amount – however, since most students have little or no income, the withdrawal payments typically result in very little or no taxes.  

Will taxes be owing if the RESP is closed?  

There are several options if your child decides not to continue education after high school. If you choose to close the RESP, you’ll have to pay tax on the money you earned in your plan as interest. 

Earnings accumulated through the CESG must be returned to the Government of Canada, and therefore are not taxable income.  

When an RESP is closed, the remaining investment earnings can be paid out to you as an Accumulated Income Payment (AIP). These funds are considered income and are taxed at your marginal tax rate, plus an additional 20% penalty. 

To avoid the 20% extra penalty and defer any income taxes, you may be able to move these funds to your or your spouse’s RRSP.  

The Government of Canada provides more information. 

Let’s talk 

I’m happy to connect with you to answer any other question you may have on how RESPs are taxed. Also, check out Canada Revenue Agency’s (CRA) website for additional information.