How to Divide RESP Funds Fairly Among Three Kids and Cut Taxes

Q. I have a registered education savings plan (RESP) for my three children. The youngest is starting university this fall. We’ve already made some withdrawals for the older two, but the plan still holds substantial funds. Our middle child has chosen a co-op university program that will largely fund itself. When we made contributions to the RESP, some of the funds and the government grants were allocated under his name. To be fair to him and to minimize taxes, I assume there’s a minimum educational assistance payment (EAP) I should withdraw for him. What should I do next? – Paul

A. Congratulations on planning ahead, Paul. You’re right: there is a minimum EAP strategy you should follow, and it will generally benefit both you and your son. The exact amount depends on how much of the RESP is funded and how the government grants were allocated.

Quick reminder: an EAP consists of the government grant (up to $7,200 per beneficiary lifetime) and the investment earnings on both your contributions and the grant. Grants can be allocated among beneficiaries within a family plan, but each child can only receive up to the $7,200 maximum; unused grant amounts must be returned to the Government of Canada if they can’t be applied to a beneficiary.

Because of this, your priority should be to ensure the grant portion allocated to your middle child is paid out as EAPs rather than left unused. However, there are rules and tax considerations to bear in mind. In the first 13 weeks of a student’s post-secondary program you can withdraw up to $8,000 in EAPs for a full‑time student (or $4,000 for a part‑time student). Those limits apply to the taxable EAP portion only; you may withdraw capital (the original contributions) at any time tax‑free.

A common approach is to take the maximum allowable EAP during the first 13 weeks of the program. That early period is typically when students have their lowest taxable income, so they often pay little or no tax on those EAPs. Review your son’s expected taxable income for the year and estimate how much of the RESP should be taken as taxable EAPs versus tax‑free capital withdrawals. Based on that, decide whether to withdraw the remaining EAPs immediately or to spread them over later years.

It’s also sensible to avoid leaving EAPs until a student’s final year when they might graduate and move into higher‑paid work—their marginal tax rate could be higher then. Many families aim to take EAPs before the final spring semester for that reason.

In your particular case, after the initial 13‑week period you may withdraw as much as you need from the RESP regardless of actual school costs. Only the grant portion, if fully maximized, must be applied to a specified beneficiary; that gives you flexibility in timing EAP withdrawals. If not all grants were maximized across your children, you can allocate more of the EAP to the child with the lowest tax rate to reduce overall tax paid. Remember the lifetime grant cap per child is $7,200.

For example, if one or two children had low or no summer earnings during the pandemic, it may make sense to draw a larger EAP for them in those low‑income years—even if they don’t strictly need the money for expenses. Any excess funds can be deposited into their TFSA (if they have contribution room) or into your TFSA, and then reallocated later as needed.

Also plan to empty the RESP by the time your children finish post‑secondary education. If money remains after the education period, you can withdraw your original contributions tax‑free, but any leftover EAPs will be taxed at your marginal rate plus an additional 20% penalty. If you have RRSP contribution room you may be able to transfer some of the EAPs into an RRSP and claim a deduction, which can help reduce the tax impact.

If your RRSPs are already maximized and funds remain in the RESP, you might delay withdrawals until required by the RESP’s maximum term (generally up to 35 years after opening, depending on plan rules). While funds remain in the RESP they continue to grow tax‑sheltered, and future years may present lower tax brackets for beneficiaries who return to school or have lower income.

In short: yes, you should withdraw EAPs to capture the grant allocated to your middle child. Time the withdrawals to coincide with the years when his taxable income is lowest to minimize tax. Use capital withdrawals and family allocation options to smooth taxable income across beneficiaries, and aim to exhaust grants before the RESP must be closed. Even when EAPs are taxed, taking the grant typically leaves you and your son financially ahead compared with returning the grant to the government.

Allan Norman, M.Sc., CFP, CIM, RWM, is a fee‑only certified financial planner with Atlantis Financial Inc. and a licensed investment advisor with Aligned Capital Partners Inc. He can be reached at atlantisfinancial.ca or [email protected].

More about RESPs:

• What to do when you have insufficient or unused RESP funds
• Student Money: How to pay for school and have a life — a guide for students and parents
• RESP vs RRSP and TFSA: What’s the best option for education savings?
• How much money does the government contribute to an RESP?