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investor clinic

Our daughter was accepted to college last year in her final year of high school, and we made a withdrawal from her registered education savings plan and paid the tuition in full. However, before classes started, the school informed us her final marks did not meet the minimum requirements and refunded our money. She is now trying to improve her marks so she can attend next year.

My question is: What happens to the money? Do we have to put it back into the RESP? What are the tax consequences? I do not want to lose the 20-per-cent grant the government has been putting into the plan.

I put this question to Mike Holman, author of The RESP Book and editor of

"The reader does not have to put the money back into the RESP and they won't lose any grant money or face any extra taxes or penalties," Mr. Holman said.

When the withdrawal request was made to the financial institution, the parents would have had to provide proof of their daughter's acceptance. As long as she was legitimately enrolled at the time, "the parents can do whatever they want with the money, including saving it for when the child eventually gets accepted," he said.

As for the tax consequences, it depends on what portion of the withdrawal was designated as an "educational assistant payment." EAPs are drawn from government grants, capital gains, interest and dividends that have accumulated inside the RESP. EAPs are taxable in the hands of the student; withdrawals designated as coming from contributions to the RESP are not taxable.

"The student will get a tax slip in the new year indicating an amount to be added to her income which will be equal to the non-contribution amount of the withdrawal," Mr. Holman said.

Can I move stocks from a registered retirement savings plan to a tax-free savings account?

Yes, you can transfer shares from an RRSP to a TFSA, but it's a two-stage process and there are tax implications.

First, you must withdraw the shares from your RRSP to a non-registered account. When you make an RRSP withdrawal, whether of cash or an "in-kind" transfer of shares, the amount will be added to your income for that year. As a result, the financial institution will hold back some tax: 10 per cent for withdrawals up to $5,000, 20 per cent for amounts from $5,000.01 to $15,000, and 30 per cent for withdrawals of more than $15,000. (Withholding tax rates are different in Quebec.)

If you don't have enough cash in the account to cover the withholding tax, you'll have to sell some investments and possibly pay a commission. What's more, you may have to pay a deregistration fee. At my discount broker, it's $25. Once the shares are in your non-registered account, you can contribute them to your TFSA. Because of the tax consequences, you must carefully weigh the costs and benefits of making an RRSP withdrawal. "You would only withdraw from an RRSP in a year where you have unusually low income, unless of course you need the money," said Derek Moran of Smarter Financial Planning in Kelowna, B.C.

I hold shares in a non-registered account. Can I transfer some of them to my own TFSA, or to an adult child's TFSA?

You can transfer shares "in-kind" to your own TFSA but, again, be mindful of the tax consequences. When you make such a transfer, you are deemed to have sold the shares at their fair market value and are responsible for any capital gains tax. You cannot claim a capital loss, however. To do so, you would have to sell the shares and contribute the cash to your TFSA, where you could repurchase the shares after 30 days to avoid the "superficial loss rule."

Contributing the shares to an adult child's TFSA is more complicated. Your child would need to open a non-registered account, and you would have to fill out a "direction to transfer securities" form to designate the shares as a gift to your child. This also constitutes a deemed sale and you would be responsible for any capital gains taxes. Your child could then contribute the shares to his or her own TFSA.

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