What causes specific drawbacks when withdrawing funds from Registered Education Savings Plans?

Unfiltered Response:

Every weekend, one of our journalists, along with experts, tackles one of your questions on economics, finance, markets, and more on our site.

This week, we're answering a burning question from Camille Dauphinais-Pelletier on our website: Why are withdrawals by a young beneficiary of a RESP (Registered Education Savings Plan) taxable even though the funds deposited by the subscriber have already been taxed? Let's crack this nutshell open, shall we?

Here's the deal: the cash in an RESP account at the time of withdrawal consists of two parts:

The contributions made by the subscriber over the years, which have already been taxed.
The rest of the money, which is a mix of investment income and gov't grants, that's never been taxed before.

When the beneficiary starts their post-secondary education and withdrawals start rolling in, the subscriber gets to choose from which part of the RESP to withdraw funds. If it's the contributions, the gotta-pay-the-tax bill disappears, regardless of whether the money finds its way into the student's account or the subscriber reclaims it.

But here's where things get interesting: it's when withdrawals come from the other portion of the account – otherwise known as Education Assistance Payments (EAPs) – that the amounts become taxable, and you guessed it, in the name of the young scholar.

Benoit Gaudreau, a financial advisor from iA Private Wealth, breaks it down: "The youngster will receive a tax slip for this, because these amounts are made up of grants and growth, and they haven't been taxed as long as they're in the account."

Ideally, you want to tap those EAP funds when the student's income is at its lowest to minimize tax payments. "Usually, this is when they're in CEGEP that the young'un has the lowest income, so that's when we want to withdraw the most education assistance payments. But it's also when they need it the least," points out Benoit, who heads up the Gaudreau Leclerc Investment Group specialized in managing RESPs.

Why? Tuition fees at CEGEP are substantially cheaper than those at uni, and there's a higher odds the youngster is still living with the folks. It might be tempting to push back withdrawals, especially if the tax rules aren't crystal clear.

"What I advise folks is to make the education assistance payment withdrawal first. The youngster usually starts their studies in the fall, so we have a pretty good idea of their student employment income for the year. If, for example, they earned $10,000, we can pick to withdraw $6,000, because their annual income won't surpass the taxable threshold," explains Benoit.

For the 2025 tax year, the threshold stands at $16,129 federally and $18,571 provincially.

If the student doesn't need the moolah in the year and turned 18, it could be smart to open a TFSA for them and stash the moolah during their studies, so it can grow tax-free.

If the subscriber is concerned the young'un will squander the dosh, they can ask the bank to park the cash in their own account instead – even though it gets slapped with a tax bill in the youngster's name – and then manage its distribution to the student at their own pace, emphasizes Benoit.

The RESP withdrawal strategy can be influenced by the student's choice of studies. If they're aiming for a university program that includes paid internships, their income could be significantly higher during uni, increasing the likelihood they'll pay tax on the education aid payments. A rapid withdrawal of Canadian Education Savings Grants (CESG) is even more crucial in this case.

On the flip side, if their studies are anticipated to be short, it's essential not to delay the withdrawal of the CESG. It's better to pay tax on these amounts than to leave them in the account, as they will be forfeited to the government if not used. If the income related to growth isn't withdrawn, the holder can, for instance, transfer it to their Registered Retirement Savings Plan (RRSP) if there's still contribution room, but otherwise, it will be taxed at an additional rate, notes Benoit.

In a nutshell, the cash in a RESP won't get taxed twice, and it's essential to withdraw those yet-to-be-taxed funds when the student is thought to have the least income.

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The contributions made by the subscriber in a Registered Education Savings Plan (RESP) have already been taxed, but Education Assistance Payments (EAPs) – the rest of the money which is a mix of investment income and government grants – are taxable when withdrawn by the student.
Financial advisor Benoit Gaudreau recommends withdrawing EAPs when the student's income is at its lowest, like during CEGEP, to minimize tax payments.
According to the text, for the 2025 tax year, the taxable threshold federally is $16,129 and provincially is $18,571.
If the student doesn't need the money during the year and has turned 18, it could be smart to open a Tax-Free Savings Account (TFSA) for them and stash the money during their studies, so it can grow tax-free.

What causes specific drawbacks when withdrawing funds from Registered Education Savings Plans?