RESP

TERMINATING AN RESP – What to do with Earnings

When terminating an RESP a subscriber has 3 options available for distributing any remaining earnings:

  1. Accumulated Income Payment (AIP)
  2. Transfer RESP earnings to an RRSP
  3. Charitable donation to a designated educational institution in Canada

Regardless of the option selected, grant remaining at the time of termination must be repaid to HRSDC.



Accumulated Income Payments (AIPs)

Definition: An Accumulated Income Payment (AIP) is a distribution of earnings from the RESP to the subscriber. It must be made to or for a single subscribers at a time for income tax purposes and the plan needs to be terminated by the last day of February in the year following the year in which the first AIP is made.

Conditions for an AIP: An RESP may allow for an AIP when all of the following conditions have been met:

  • The subscriber is a resident of Canada

    AND

  • The payment is made to one subscriber of the plan

    AND

  • The plan has been open for 10 years and each individual beneficiary is over 21 years of age and not eligible for an educational Assistance Payment (EAP)

    OR

  • The plan is being closed after 35 years.

    OR

  • All beneficiaries are deceased.

Forms required:

A Letter of Direction signed by the subscriber(s) stating that the Beneficiary(s) has no intention of going back to school.

AIP withdrawals are subject to two different taxes: regular income tax and an additional 20% tax. In Quebec, the 20% tax is divided as follows: 12% to CRA and 8% to Revenue Quebec).

To reduce taxes owed, clients can choose to transfer the earnings in their RESP to their RSP or their spouse’s RSP.

Transferring RESP earnings to an RRSP

This option is only available to the original subscriber. The earnings can be rolled over to the subscriber’s RRSP or over to their spouse’s RRSP.

Forms required:

  • A letter of direction signed by the subscriber(s) stating that the Beneficiary(s) has no intention of going back to school
  • Revenue Canada form T1171

Charitable Donation to a Designated Educational Institution in Canada

RESP earnings can be donated to an educational insitution in Canada. (The donation is not eligible for a tax receipt)

Forms required:

A letter of direction signed by the subscriber stating that the Beneficiary(s) has no intention of pursuing post secondary studies.