Skip to main content
investor clinic

My daughter will be starting university this fall and I will need to withdraw money from her registered education savings plan. What should I withdraw first – contributions, investment earnings or a combination?

First, some background. When your child enrolls in postsecondary school, there are two types of RESP withdrawals you can make: a refund of contributions, which represents the funds you deposited into the RESP, and an educational assistance payment (EAP), which consists of investment earnings and government grants that have accumulated in the plan.

A refund of contributions is tax-free and can be made at any time, so there’s no reason to withdraw the money now unless you need it. An EAP, on the other hand, is taxable in the beneficiary’s hands, so the timing of your EAPs is important. Exhausting EAPs while your daughter is in school should be a priority, because if she quits or graduates and there are still grants and earnings in the plan, there could be stiff financial penalties.

Here’s the good news: Because many students have little or no income, and because they qualify for basic personal tax credits and the federal tuition credit, it’s often possible to make fairly large EAP withdrawals with negligible tax consequences. In Ontario, for example, a student paying tuition of $5,000 – and who has no other sources of income – could receive an EAP of up to about $15,700 without paying any tax. (I’m basing this on the 2020 Canadian income tax calculator at taxtips.ca; do your own calculations or talk to an adviser before deciding how much to withdraw as an EAP.)

Generally, it’s most tax efficient to spread your EAPs fairly evenly across the years when your daughter is in school to keep the tax hit in any one year to a minimum. However, if her income is expected to be higher in a particular year – say she gets a part-time job – you could dial back the EAP in that year and withdraw more contributions. If you have an especially large RESP, it may not be possible for your daughter to avoid paying tax entirely, but consider yourselves fortunate to have this “problem.”

Also keep in mind that EAPs are limited to $5,000 in the first 13 weeks of a full-time program (you’ll need to provide your financial institution, or “promoter,” with proof of enrolment to make an EAP). After that, there is theoretically no limit on EAP withdrawals, but your financial institution may ask for proof that the money is for educational expenses. However, in a recent bulletin, the federal government said it considers EAP requests below its inflation-indexed annual threshold limit ($24,432 for 2020) to be acceptable. “We do not expect promoters to assess the reasonableness of each expense item as long as the conditions permitting an EAP are met,” it said.

Regarding the recent Brookfield Renewable Partners LP (BEP.UN) unit split, can you explain again how you determined the adjusted cost base (ACB) of the new Brookfield Renewable Corp. (BEPC) shares? My broker is providing a different figure.

In last week’s column, I indicated that investors should reduce the total ACB of their BEP.UN units by the fair market value of the new BEPC shares received in the special distribution. One acceptable method of calculating the fair market value of the BEPC shares is to use the volume-weighted average price (VWAP) of BEPC in its first five trading days on the Toronto Stock Exchange. According to the “Tax Information” section on Brookfield Renewable Corp.‘s website, BEPC’s five-day VWAP for the period ended Aug. 6 was $58.28.

If you’re investing in a non-registered account, you need to know the ACB of your BEP.UN units and BEPC shares to calculate the capital gain when you eventually sell. (Note that your BEP.UN cost base would be further reduced by any future return of capital distributions from BEP.UN.)

However, based on feedback from readers, I have since learned that some brokers are using different numbers for the book cost of the new BEPC shares. RBC Dominion Securities, for instance, issued a bulletin indicating a cost of $61.46 a share. Another broker set BEPC’s cost base at $60.

“There are multiple allowable methods of determining a fair market value for these types of events under [Canada Revenue Agency] reporting guidelines,” the RBC bulletin said. “Brookfield has issued a cost value determination using an alternate, acceptable method … but neither their figure, nor ours, is more accurate than the other – just different.”

If the book cost figure provided by your broker for BEPC seems wildly out of line, ask for an explanation. Brokers have been known to make mistakes. And remember, this only matters for non-registered accounts as there are no capital gains taxes in registered accounts.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Report an error

Editorial code of conduct

Tickers mentioned in this story