A. Great question, Barbara. Since your parents are the RESP subscribers – that is, they set up the account for you and made the dues – the money is legally theirs until they turn it over to you, the beneficiary. But once the money is in your hands it is legally yours and you don’t have to repay it.
However, there are a few other things you and your parents should keep in mind about your RESP funds, especially given your planned dropout.
As you may recall, in the first semester of your freshman year of study, you were allowed a maximum of $ 5,000 in Educational Assistance Payments (EAP), which is the government grants paid into the RESP and any interest or investment gains on the RESP savings. As a beneficiary, these EAP withdrawals become part of your annual taxable income.
You were also allowed to draw any amount from Available Post-Secondary Education Funds (PSE) or your parent’s principal contributions to the plan. PSE withdrawals are not taxable as your parents already taxed this money when they earned it.
After the first semester, EAP and PSE withdrawals of any amount and combination are permitted, provided you have proof of enrollment at a suitable post-secondary institution and program. But if you leave school – as you planned – and more than a year goes by before you return, you will again be capped at $ 5,000 EAP in the first semester.
In addition, it is important to understand that the maximum lifespan of an RESP account is 35 years. At this point, the plan must be closed and the remaining amount of money will be distributed as follows:
- The grant is repaid to the government
- The principal is returned to the subscribers (your parents) and
- The increment is returned to the subscribers (your parents) as taxable income along with a 20% penalty.
Therefore, it is in your parents’ best interests to withdraw all of the money from the RESP while you qualify for withdrawals and before the plan expires after 35 years.
If you are leaving school and there is a chance that you will not return, your parents should now consider withdrawing all RESP funds after taking the following into account: