Avoid Student Debt: Use Your EAPs

Just over 2 Million Canadians are enrolled in post-secondary schools in Canada and about half of them incur debt to get through school. This, according to a recent survey by Maclean’s magazine, which also noted that nearly 2/3 of students don’t have an RESP. That means they have no Education Assistance Payments (EAPs) to fund education costs. Here’s how they work.

Excerpted from Essential Tax Facts, 2019 Edition By Evelyn Jacks

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The EAPs that are withdrawn from a student’s Registered Education Savings Plan (RESP) represent earnings in the plan as well as government contributions and are taxable to the student. Each RESP provider will have their own form to request an Education Assistance Payment.  The best news?  The actual contributions may be either returned to the subscriber or paid to the student with no income tax consequences. This includes the CESG (Canada Education Savings Grant) earned along the way, which will form part of the EAPs.

Stay in School to Access All Your RESP. For full-time studies, the maximum EAP is $5,000 until the student has completed 13 consecutive weeks in a qualifying education program at a post-secondary educational institution. After 13 weeks, any amount up to the maximum annual EAP limit ($23,976 in 2019) may be withdrawn without verification.

For part-time students, who spend a minimum of 12 hours a month on coursework, the maximum EAP is $2,500 per 13-week semester.

Knowledge Bureau Programs online programs qualify.  Knowledge Bureau is a post-secondary training institute whose certificate, diploma and designation training programs qualify under the part-time student criteria.  Students who wish to start summer school may wish to access funding now. Knowledge Bureau courses also qualify under several provincial programs including the Canada-Alberta Job Grant.

Starts and stops. Beneficiaries under an RESP are allowed  to receive  EAPs for  up to six months after ceasing enrolment in a qualifying educational program. But, if for a period of 12 months, the student does not enroll in a qualifying education program, the 13-week period and the $5,000 limitation will be imposed again.

Studying Abroad? The 13-week period for full-time students has recently been reduced to 3 weeks for students studying outside Canada.

Use the money as intended. If amounts are withdrawn from the RESP for purposes other than EAP payments, the lesser of the undistributed CESG amounts and 20% of the amount withdrawn will be returned to the government by the RESP. Should the beneficiary be required to repay any CESG amounts received as Educational Assistance Payments, a deduction for the amount repaid may be taken on the tax return.

Accumulated Income Payments. If the student does not attend post-secondary school by the time s/he reaches the age of 31, and there are no qualifying substitute beneficiaries, the contributions can go back to the original subscriber. If this happens, the income earned in the plan over the years will become taxable to the subscriber, but it is also subject to a special penalty tax of 20% in addition to the regular taxes payable. Such income inclusions are called “Accumulated Income Payments” or AIPs. Form T1172 Additional Tax on Accumulated Income Payments from RESPs must be completed to compute this tax. As an alternative, if the subscriber has unused RRSP contribution room, AIPs can be contributed into the subscriber’s RRSP, up to a lifetime maximum of $50,000.

If amounts are transferred to an RRSP, Form T1171 Tax Withholding Waiver on Accumulated Income Payments from RESPs may be used to reduce or eliminate tax withheld on the AIP.

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