Understand RESP categories when making withdrawals

Key Learnings:

• There are different types of RESP withdrawals, and the choice you make can have important financial consequences. Always review your RESP withdrawal options with your advisor.
• Make sure you understand the tax and cost implications of withdrawals from your RESP and work with your advisor to create a withdrawal plan that is best for you and your family. Otherwise, your beneficiary may lose out on government grants or have to pay additional income taxes.

Ms. K had a family RESP for her four children. She began withdrawing from the plan in 2009 as her children started to attend university.

How the RESP withdrawals were made

Each year, close to the time school started, she would call her advisor, who was also a Certified Financial Planner (CFP), and tell him how much money she needed from the plan. Ms. K would provide documents showing her child’s enrolment and then Ms. K’s advisor would fill out the withdrawal form for her. Ms. K then signed the form. On the form, the type of withdrawal had to be selected. The types available were: Educational Assistance Payment (EAP), Post-Secondary Educational Capital Withdrawal (PSE), or Non-Educational Capital Withdrawal. Beneath each selection was a brief description of the requirements for the withdrawal and the related tax consequences.

A brief overview of the types of withdrawals

Within an RESP, there are two major components: EAP and Capital. EAP represents the government grants and the plan’s investment earnings. Capital is the client’s contributions. These two components have very different characteristics, requirements, and tax treatment.

When withdrawing from the EAP portion of the account, the beneficiary must declare it as taxable income. To receive an EAP, there are conditions that must be met. If the conditions are not met, the grants may not be withdrawn from the RESP. Lastly, government rules prohibit a firm from paying a beneficiary more than $7,200 in Canada Education Savings Grants.

Capital and Non-Education Capital are the client’s contributions, which are non-taxable to either the contributor or beneficiary (student). Since capital withdrawals are from the contributions to the plan, there are fewer requirements to fulfill.

Advisor provided inadequate advice on RESP withdrawals

For each form Ms. K signed between 2009 and 2016, PSE was selected by the advisor. This meant that withdrawals were being made only from the money Ms. K had deposited into the plan instead of from the earnings and government grants in the RESP.

In the early years, Ms. K signed forms to make PSE (capital) withdrawals for her older children. The withdrawals were tax free which was advantageous for the older children. However, the capital portion of the RESP was being depleted, so it left only EAP (which included government grants) in the plan.

Eventually, there was no capital remaining. All that was left in the RESP was the taxable EAP portion. Of the EAP remaining in the account there were far more Canada Education Savings Grants than her youngest child was allowed to withdraw. Her older children had completed their education, and were therefore ineligible to receive those grants.

By 2016, Ms. K discovered she had substantial unused Canada Educational Savings Grants, which she would lose since most of her children were already finished school, and EAP amounts which would now be taxable in the hands of her employed children because of their income levels. While the advisor said this selection was discussed with Ms. K annually, she disagreed, but confirmed that she had received copies of the signed withdrawal forms. She raised this issue with the advisor’s firm, which said that since she authorized each transaction it was not responsible for her losses.

What did OBSI do?

OBSI calculated Ms. K’s losses to be $11,129. OBSI’s investigation showed that Ms. K was an educated professional who had signed and received copies of the form each year and had the opportunity to ask about the tax implications of her choices. She also acknowledged that the disclosure received from the firm explained the impact of the different types of withdrawals. However, OBSI also found that her advisor had an obligation to review the educational withdrawal options with her and formulate an effective plan to withdraw grants for each child and maximize the overall benefit for Ms. K’s four children. At a minimum, the advisor should have warned Ms. K of the tax and grant implications of continuing to make only PSE withdrawals.

OBSI’s decision

OBSI concluded that the advisor didn’t provide adequate advice but Ms. K had some responsibility for the losses since she agreed to the withdrawals and didn’t ask questions about the information she received and the documents she was asked to sign. The firm offered 50% of Ms. K’s losses and she accepted.

This complaint was upheld

(2017)