A tricky thing about RESP payments

Advisor's Edge


It’s common for advisors to recommend that parents—and sometimes even grandparents—set up RESPs to help pay for the their (grand)kids’ postsecondary education, thereby becoming subscribers to these plans.

While the merits of investing in an RESP, and its accompanying 20% matching Canada Education Savings Grants (CESGs), are well covered, less has been written about RESP withdrawals.

The subscriber’s RESP contributions, which were not tax deductible, can generally be withdrawn at any time, free from tax. Any other funds coming out of the plan for post-secondary education purposes are referred to as educational assistance payments (EAPs), formally defined in the Income Tax Act as “any amount, other than a refund of payments, paid out of an education savings plan to or for an individual to assist the individual to further the individual’s education at a post-secondary school level.”

EAPs include the income, gains and CESGs in the RESP. When these are paid out, they are taxable to the student receiving the funds who, in many cases, will either pay minimal or no tax at all on the EAPs withdrawn, owing to the various personal tax credits available to students. For example, the 2017 basic personal amount ($11,635), combined with a tuition credit ($6,500 for estimated average 2016/2017 Canadian undergraduate tuition fees), means a student could withdraw about $18,000 of EAPs annually, tax-free, assuming no other income. (Note that education and textbook credits, which were eliminated in last year’s federal budget, are no longer available to shelter the student’s EAP income.)

A tax case decided last fall dealt with an RESP beneficiary who was upset that he had to include EAPs in his income. He argued he never “received this or any amount directly or indirectly.” The beneficiary was also “concerned that he does not know the terms of the [RESP] trust, nor anything else about it.”

The case (Shreedhar v The Queen, 2016 TCC 254) involved Sunil Shreedhar, who was appealing a CRA reassessment that included in his income an amount reported to CRA as an EAP from an RESP set up by his grandfather.

While CRA reassessed the taxpayer by including the EAP in his income, CRA then deducted a corresponding amount from unclaimed tuition, education and textbook credits to reduce his tax to zero. This resulted in a nil assessment—something to which you cannot normally object. CRA attempted to quash the taxpayer’s appeal on the basis that you can’t object to an assessment with no tax owing.

The judge disagreed, and found that the taxpayer did indeed have the right to object since the reassessment also included $2.10 of arrears interest, making it not a nil assessment.

This case only dealt with the taxpayer’s right to appeal, not whether or not the EAP was properly taxable—that would need to be the subject of a separate court hearing.

As the judge stated, “the student was clear that his driving concern in appealing was that he was not aware of, or provided with, the information by the CRA […] or his grandfather with which he could conclude that the amount was properly includable in his income. It is not entirely clear to me that a court hearing will help resolve this aspect unless he is prepared to subpoena his grandfather. I would hope that between the [CRA…] and the [taxpayer’s] grandfather, a more efficient way to help the [taxpayer] ascertain if his concerns are warranted can easily be recognized and acted upon.”


While some RESP issuers require the beneficiary (or their parent, if they are a minor) to agree to EAPs being paid, others do not. In fact, the Act doesn’t require the RESP issuer to get the beneficiary’s consent before it makes an EAP. The way the Act is worded, a beneficiary can indeed be hit with an income inclusion, even if the subscriber doesn’t tell the beneficiary how the money was spent.

When an EAP is made, the RESP provider must send written notice to the beneficiary showing how much of the EAP is made up of government incentives (federal and provincial), such as the CESGs, and of the beneficiary’s obligation to repay any incentives to which they are not entitled. In that same notice, some financial institutions will tell the beneficiary that the EAP will be included in their income. This is then followed with a T-slip by the end of February in the year after payment. If your clients’ children receive unfamiliar EAP notices, make sure they start asking questions before being assessed by CRA.