RESP...still don't know what it means for me

January 29, 2007 7:47 PM

College savings: Does the government care how you spend a college savings plan in Canada?

More than a year ago, I asked about registered educational savings plans. Now I'm wondering how the (Canadian) government regulates how you spend them.

I understand when my child(ren) can withdraw the funds and that they have to be registered in a post-secondary program. But, aside from that, how does the government check to see what you spent the money on?

I see that there's a $42,000 contribution limit over your child's lifetime. Let's say this grows to $78k. Tuition in, say, 2023, is $12k per year and my child needs a total of $50k to cover four years while living at home. My child also works at some internships and part-time jobs that cover, say, $24k of expenses. After they kick that in, there's around $50k left in the RESP. Heck, let's say there's even $25k left.

Do you have to spend this money on room and board? What's to stop someone from using this to save for a downpayment on a condo that they help their child upon graduation? Or for a car to help them get to school? Or for some other purpose? (I recognize the money is taxed in the child's hands upon withdrawal, but let's assume the child hangs on to the withdrawn money.)

And, if your child only does a one-semester program, can they pull all the money out at once? The government's RESP page is pretty vague.

posted by acoutu to work & money (7 comments total)

For whatever an anecdote is worth: mine never went directly to tuition. My father made periodic deposits directly into my bank account while I was in school, and that then went to the pub, to a trip, to IKEA, etc, etc. I drew student loans at the same time, and used that for the books and tuition and so forth; the RESP money was just gravy that let me live in a nice apartment.

I can think of no sensible way for "the government (to) check to see what you spent the money on," so long as one is a paid-up student.

More anecdotal what-not: a friend of mine was busy at the time investing the money he got through OSAP; he didn't need the loans, but, why turn down such a good deal? There weren't, I don't think, even any rules against that.
posted by kmennie at 7:59 PM on January 29, 2007

Weird synchonicity. I have no direct experience with these, but about two hours ago I read an advice column in The Province asking a related question, namely, what if the child doesn't want to go to university. The answer mentioned that the funds must be applied to an eligable post-secondary program, though it doesn't specifiy how they check on this, and also the money can be transfered to other children in the family, to the parents RRSP, or withdrawn (minus the grant portion and various taxes).
posted by PercussivePaul at 8:16 PM on January 29, 2007

This being the Government of Canada, there's more than one department responsible for this - try this section of the the CRA page for more info.

Essentially, payments can be used for anything, but if your child only did one semester, the most they could receive would be $5000.

Limit on EAPs - For RESPs entered into after 1998, the maximum amount of EAPs that can be made to a student as soon as he or she qualifies to receive them, is $5,000. After the student has completed 13 consecutive weeks in the qualifying educational program, there is no limit on the amount of EAPs that can be paid if the student continues to qualify to receive them. If there is a 12-month period in which the student is not enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum applies again.

Human Resources and Social Development Canada may, on a case-by-case basis, approve an EAP amount of more than the above limit if the cost of tuition plus related expenses for a particular program is substantially higher than the average.

It is important to note that when your child stops going to school, the balance of the RESP is yours, not theirs. At this point any remaining govt. contributions revert to the govt. If you want, you can roll the rest into an RRSP. Or, your original investment can be withdrawn, tax free (you have already paid income tax on it, unlike an RRSP). Any income (interest) your original investment has earned can be paid out to you, but is taxable at your current rate plus a 20% penalty (see here).
posted by Urban Hermit at 8:30 PM on January 29, 2007

From this RBC guide to RESPs, a slight caveat on my statement that payments can be used for "anything":

To elect an EAP, the subscriber must sign a withdrawal form, and the beneficiary must provide proof of enrollment in a qualifying program. The funds must be used to cover the beneficiary’s education expenses, and HRSDC may request supporting information for EAPs of unusually large amounts.
posted by Urban Hermit at 8:34 PM on January 29, 2007

Okay, from Urban Hermit's info, I thought perhaps you could pull out $5k for the first semester, then pull out everything in a following semester. But the follow up comment notes that you may have to explain unusually large amounts.

I suppose, though, that if you pulled out the money one year at a time, you could still have your child set it aside for a downpayment on a condo or for some other purpose. (One could even have their child rent the condo, act as property manager and collect an income which would be a write off for the parents.)

I wasn't interest in taking the balance of the RESP. We'd lose the grant money and then have to pay a penalty on the interest. (And it isn't clear to me whether they'd give me my 40% if I transferred it to an RRSP...that's something I'd consider if it's true.)
posted by acoutu at 9:24 PM on January 29, 2007

All I know is that when I withdrew mine (about 2,000 a year for 5 years, from 1996-2000) I never specifically used them for school purposes; all I had to show (or my dad had to show) was that I was a full time student and (I think) under 25. I just cashed the cheque and used the money for whatever, be it food or beer or textbooks.

Previewing, I guess they can check up on you, but I doubt my measly 2 grand a year was anything they'd consider a large amount.
posted by cgg at 8:11 AM on January 30, 2007

Thanks, everyone.
posted by acoutu at 9:55 PM on January 30, 2007