RESP Withdrawals From Family Plan Account – Don’t Overpay Grants To A Beneficiary

by Mike Holman

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One of the main benefits of an RESP family plan account is that you can have RESP money for multiple children in one account, which is supposed to reduce costs and simplify your life.  In fact, there are some drawbacks of family plans which make me wish I had kept my kids’ RESP accounts separate.

In the RESP world, $7,200 is an important number.  It’s the total amount of RESP grant money that can be paid to any one child.  On the RESP contribution side, this means that once a child has received $7,200 of grants – any future contributions will not receive any grant money.

This rule also applies to the RESP withdrawal phase. When you are making payments to a student – that child cannot receive more than $7,200 worth of grants.  Any excess amount of grants paid to a child will have to be returned to the government.

But I thought all money in a family plan can be shared between beneficiaries?

Not always.

Let me explain:

In every RESP account there are two kinds of money – the contribution amount and the non-contribution amount (which is made up of earnings and grants).

  • Contribution amount – Can be shared without restriction.
  • Earnings (ie capital gains, dividends, interest) – Can be shared without restriction.
  • Grants – Can be shared as long as the $7,200 grant limit per child is respected.

When you make an Educational Assistance Payment (EAP) to a student, it will come from the non-contribution portion of the RESP account and will always contain some grant money.  You don’t have the option of specifying how much of the EAP will be grant money – it’s an automatic calculation.

You do however have the option of specifying whether a payment to the student will come from the contribution portion (this is called a post-secondary education withdrawal or PSE) or the non-contribution portion (EAP).

Example

You have two kids – 15 and 18 years old.  They have a family RESP account and the grants have been maxed out the grants for both of them ($7,200 each).

Note – In reality, neither child in this example could have $7,200 in grants, since RESP grants were only available since 1998.  I’m just using it as an example.

If your eldest child starts post-secondary education, you will likely start making RESP withdrawals.  If some of those withdrawals are Educational Assistance Payments, they will contain grant money.

If you were to pay out all the non-contribution money to the oldest child, they would receive all the grant money ($14,400).  Because the limit per child is $7,200 – the excess $7,200 of grants would have to be paid back to the government.  This would be a very expensive mistake.

This overpayment scenario can happen as long as there is more than $7,200 of grant money in the family account.  If there is less than $7,200 of grants – you have nothing to worry about.

Won’t my financial company or advisor stop me from doing this?

No.  There are situations where overpaying grants to a beneficiary makes sense – such as when an older child decides not to go to school and you want to pay out all the non-contribution money to the younger child.

Federal rules dictate that when you make an Educational Assistance Payment, your financial institution has to send you a letter indicating the amount of the EAP and how much grant money was part of the payment.  Some institutions will even include the total amount of grants paid to that beneficiary to date.

The problem is that by the time you get the letter, it’s too late.  You need to figure out the grant situation before you request the EAP.

How to avoid overpaying RESP grants to a beneficiary

Every time you make an Educational Assistance Payment to a child, proof of enrolment has to be provided to the financial institution.  At that time you should ask the following questions:

  1. How much grant money has been paid to the beneficiary so far?
  2. How much grant money will be included in the withdrawal I’m about to request?

If the total of those two amounts is $7,200 or less, you may proceed. If not, you’ll have to lower the EAP amount.

Alternatively, you can just ask the financial institution to determine if you will go over the grant limit with your requested amount.

If you are getting near the $7,200 limit and want to use up all the available grant money with the the next EAP – ask how much the withdrawal amount should be.

Keep in mind that once you have used up all the available non-contribution money – you can still use any of the contribution money for withdrawals.

What if I just completed an EAP and put one beneficiary over the grant limit?

Call the financial institution ASAP and ask if they can cancel the withdrawal and redo it for the correct amount.  They might say no, but keep on them – they should be able to correct it.

More information

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{ 15 comments… read them below or add one }

1 Big E

Thanks Mike, good info. Can you please clarify what exactly an EAP is? Is there a difference between an EAP and PSE?

2 Big E

Never mind. I read the info on the CRA site and it all makes sense now. Good warning!

3 David

so what i take from this is that its easier to just have a separate account for each child?

4 Mike Holman

David – that’s what I’m thinking.

5 John

Here: http://www.hrsdc.gc.ca/eng/learning/education_savings/publications_resources/promoter/communications/2010/004405.shtml

It says the plan promoter can adjust the formula to avoid an overpayment:

“If the full amount of CES grant calculated from the EAP formula cannot be paid due to the $7,200 CES grant limit, the promoter can use other available amounts (CLB, provincial incentives and interest) in order to arrive at the total EAP amount requested. These additional amounts should be apportioned proportionally.”

6 Mike Holman

Nice one John – I hadn’t seen that bulletin before.

The CLB is part of the normal formula for EAPs, but I wasn’t aware that provincial grants could be used as well to avoid overpaying CESG.

The problem with this sort of “guideline” is that companies don’t have to follow them. I’ll have to do some research, but I’d be surprised if most (if any) companies offer this option.

7 G

You used an example of an 18 year old child in 2011. That child must have been born in 1993.
Government started giving out the grants only in 1998. So the maximum grant for 18 year old child is much less than $7,200 , it is around $5,600

8 Mike Holman

@G – Good catch!

I made a note in the article that I’m just making up this example.

9 Jacquie Haycroft

A very interesting article. I was aware of the rule that each beneficiary can only withdraw up to their maximum of grant money but I wasn’t aware that it is not properly tracked for clients. I will be checking with my fund company to see what their processes are! (I think for most RESP holders it’s not an issue because they’re not maxed)

10 Mike Holman

@Jacquie – It is tracked. As I mention in the article, there are situations where you want to be able to take out more than $7,200 of grants for one beneficiary.

Plus – you don’t have to be maxed to have this situation. Just need more than $7,200 of grants in a family account.

11 Lizette

Hi Mike,

I have a family plan RESP account for my 2 boys ( 5 and 3 )… with Scotia Itrade ….is there any chance I can set up an individual account for each one with the same provider and split the holdings?

12 Mike Holman

Hi Lizette. You would have to call Itrade and ask them if it’s possible.

In theory, it can be done, but I’m not sure if many or even any of the institutions have a process for splitting family accounts.

I’m not really sure it’s worthwhile anyway – there are some inconveniences with the family plan (as noted in the article), but it’s not a big problem.

13 jean123

Hello Mike,
Please correct me if I am wrong.
I have a family RESP for my 3 children.
My middle child got some resp money but is no longer in school. My youngest is in high school and my oldest changed his vocation along the way but is still in technical school.
I still have grant, income and contribution money in my account.
Since my oldest has reached his $7,200 grant withdrawal limit it means I will need to return grant money destined to my youngest if I want to give more income money to my oldest.
I would expect this will happen more often as a greater number of family plans contain $7,200, or close to $7,200 of grant money for each plan member.

A normal person setting withdrawal rules would have pegged the grant money to a specific plan member and have it returned to the government if that child did not go to university or an approved school. You would further expect that the income could at any time be allocated to the child who needs it most.
This, it seems, would have been way to easy. Instead, we got a scheme which may have been well intentioned but is really quite arbitrary and controlling.

Since I have much more income than grant money in the account, which will happen if you were diligent with contributions over a long period of time, I will probably return grant money because leftover income, if my youngest does not go to college will be taxed at a much higher rate in my hands.
I don`t think I should not be making this determination at this point but funny rules are funny rule.

Thanks
Jean123

14 Ed

Just one question, I have a family plan with one child having only been able to contribute enough to generate $6,100 of CESG while the second and younger child was able to generate $3,000 of CESG so far.

The older child is now getting ready to withdraw money from the RESP and everything I read states that she cannot withdraw more than $7,200 of CESG in her EAP’s. Is that correct or is she limited by the $6,100 that she individually generated for the plan?

If the limit is $7,200 and for example if the combination of CESG generated by the two kids was $7,200 then in essence if no other payments went in then the first child would be able to withdraw all the EAP payments.

15 Mike Holman

@Ed – Your example is correct. Kids can share the CESG but no more than $7,200 can be paid out to each child. It doesn’t matter how the CESG was created.

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