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investor clinic

In your column last week on RESPs you made no mention of group scholarship plans. Are they a good option?

I would not go near them. Group registered education savings plans, which pool your funds with those of contributors, are sold by commissioned sales representatives and charge hefty up-front fees. As a result, parents lose a chunk of their money right out of the gate. What’s more, the rules on contributions and withdrawals are complex and restrictive, and there are stiff penalties for leaving the plan early. In extreme cases, parents have lost all of their RESP savings. It’s no wonder group RESPs have sparked hundreds of consumer complaints and drawn scrutiny from regulators.

What sort of RESP do you recommend?

If you want to keep things simple, you can open an individual or family RESP at your bank and invest the money in mutual funds. For those seeking greater flexibility and lower costs, consider opening an RESP with a discount broker so you’ll be able to invest directly in stocks or exchange-traded funds. An RESP is not for gambling, so stick with blue-chip, dividend-paying companies or funds. Dialling back the risk level as your child gets closer to attending postsecondary school – by shifting funds from equities to guaranteed investment certificates, for example – is also a prudent strategy. You don’t want to get hit by a market correction just as your son or daughter heads off to college or university.

When you make an Educational Assistance Payment (EAP) withdrawal, what portion comes from grants and what portion comes from income and capital gains that have accumulated in the RESP?

First, a quick refresher. An RESP withdrawal can include a return of original contributions (which is not taxable), an EAP (which includes both grants and investment earnings and is taxable in the hands of the student), or a combination of the two. With an EAP specifically, the government uses a formula to determine the components of the withdrawal. To take a simple example, if an EAP of $5,000 is withdrawn from an RESP that has $7,000 of Canada Education Savings Grants and $13,000 of earnings, the withdrawal would represent 25 per cent of the total available EAP amount of $20,000. The CESG balance in the account would therefore be reduced by 25 per cent (to $5,250) and the earnings balance would also be reduced by 25 per cent (to $9,750).

Things get more complicated when the RESP is a family plan with two or more beneficiaries. For example, although CESGs can be shared among siblings, each beneficiary is subject to a lifetime CESG limit of $7,200. To avoid pushing a beneficiary over the limit, the financial institution will stop paying out from the CESG component of the plan and will instead deduct the funds from the earnings portion, once the individual’s CESG balance reaches zero. (A CESG overpayment could inadvertently happen, however, if a family has RESPs at two or more financial institutions and information about CESG withdrawals is not shared between them.)

If you find all of this confusing, you’re not alone. The rules governing RESPs are indeed complex; Employment and Social Development Canada, which administers the program, even provides onsite RESP training to financial institutions. If you’re keen to learn more about RESPs, much of the in-depth material – including example calculations and quizzes – is available on the ESDC website at

What about paid co-op terms?

As a reader pointed out following last week’s column, it’s important to consider paid co-op programs when planning RESP withdrawals. University co-ops pay an average of about $22 an hour (based on information from the University of Waterloo), which means students in these programs can earn well into the five figures over a four-month term. In such cases, it may be prudent to withdraw non-taxable RESP contributions during years with extensive co-op terms and make taxable EAP withdrawals during periods when the student will be primarily in the classroom and earning little or no money. This will smooth out the student’s income and reduce the amount of tax payable.

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