Parent frustrated investment firm won’t pay out daughter’s remaining RESP grants

Ms. L had set up Registered Education Savings Plans (RESPs) for her two daughters, Ms. J and Ms. K. These accounts were set up as a family RESP with their investment firm with the understanding that if one child did not go to or complete post-secondary education, the other child would be entitled to the full amounts of the plans.

Over the span of a number of years, Ms. L contributed a total of $19,000 to Ms. J’s RESP and $31,500 to Ms. K’s RESP. During that time, she believed that each daughter had accumulated $7,200 in Canada Education Savings Grant (CES grants) for a total of $14,400.

When the time came for Ms. J to attend university, Ms. L went to the firm and asked for funds to be withdrawn from Ms. J’s RESP account. She asked that only the taxable portion of the funds in the plan be withdrawn. The taxable portion would include the income that had been generated from the investments in the plan and the CES grants from the government but would not include the original principal amounts. When Ms. K attended university a year later, Ms. L made the same request for the funds to be paid the same way and was told that her requests had been filled.

Ms. J attended only the first term of university, while Ms. L’s other daughter, Ms. K, continued with her post-secondary education. Ms. L went to the firm and discussed transferring all the plan funds into Ms. K’s RESP, as she was told by the advisor that this was the only way they could withdraw the remainder of the funds for Ms. K’s education.

When she later contacted the firm, she was told that all funds had been transferred but that almost $2,000 of grant money remained in Ms. J’s account. The firm said that the funds could not be paid to Ms. K because she had already been paid her maximum amount of $7,200 in grants.

The firm’s information did not make sense to Ms. L as she believed the family had only withdrawn $2,700 of taxable funds from Ms. J’s account, of which only $900 were grants. She wondered what had happened to the remaining $4,300 in grants. She believed the firm must have incorrectly processed her payments.

She complained to the firm, which reviewed its files and confirmed that Ms. K could not withdraw the remaining $2,000 balance in her sister’s account as she had reached the grant maximum of $7,200. The only way for the family to access the remaining grants would be if Ms. J enrolled in an education program again. Ms. L wanted the firm to process her request for the remaining $2,000, but the firm would not change its position.

She came to OBSI with her complaint.

Complaint not upheld

We reviewed the information provided by Ms. L and by the firm. After itemizing all the investments and reviewing the account statements carefully, it was clear Ms. L had overestimated the grants her daughters received. A beneficiary of an RESP is eligible to receive CES grants of up to $500 per year, which is 20% of the first $2,500 contributed to the RESP each year, with a lifetime limit of $7,200. To receive the maximum amount, at least $36,000 must be contributed to an RESP account over the years the account is open. Middle- and low-income households might be eligible for slightly higher matching grants.

Ms. L’s family had made total contributions of $50,500 into the two daughters’ accounts and as a result had $10,100 in grant funds in the plan ($3,800 in Ms. J’s account and $6,300 in Ms. K’s account), but not the $14,400 Ms. L believed. It became clear Ms. L had confused the contribution limit with the actual grant amounts.

Under Canada Revenue Agency (CRA) regulations, contributions made to family RESPs, both income and grants, can be shared between the beneficiaries. However, each beneficiary can only withdraw the lifetime maximum of $7,200 in grants.

Ms. K had received $6,300 CES grants from the government and withdrew all of these grants plus $900 from her sister’s account, totalling $7,200. Ms. J received $3,800 in grants from the government and withdrew $900 for her own education, leaving a balance of $2000 in grants in her account. This meant that the firm could not make the additional withdrawal request for Ms. K because she had reached the lifetime maximum.

To withdraw the balance of grants from Ms. J’s account, Ms. J would have to be enrolled in a post-secondary educational institution – as the firm had indicated. If not, CRA requires the firm to return the unused grants to the government.

A review of both daughters’ T4 slips showed that the RESP payments were paid to each as taxable income, as Ms. L had requested, and that the payments were comprised of earnings and grants.

The firm had processed the RESP payments correctly, although it had not communicated the information about the grant program or balances in the family’s plan to Ms. L very well.

We explained this carefully to Ms. L and her family, but for these reasons, we could not make a recommendation in their favour.