Advisors have been challenged to know the RESP rules inside out to ensure clients are not left with unused leftovers and extra tax bills.
Sylvain Brisebois, Regional President, Eastern, Central and Northern Ontario, BMO Private Wealth, argued that with proper planning – and barring unforeseen drop-outs, illness or death – this is not a scenario that should happen.
While Post-Secondary Education Payments (PSC), essentially the contributions made along the way, can come out without any restrictions, the Educational Assistant Payments (EAP), made up of growth and grants, could suffer a forfeit or tax consequences if not spent.
Brisebois said it pays to have a thoughtful conversation with the child in question about whether the withdrawal is from the PSC or the EAP segment. If planned right, there shouldn’t be a big surprise down the road but there is also the nuance of EAP being taxable to the beneficiary.
It’s prudent, therefore, for children to take advantage of a low-income year to be virtually tax free or to combine the EAP and PSE so it doesn’t create more tax as they take money out.
RESP 101 right? Well, yes, but Brisebois, and he puts himself in the same bucket, believes advisors would not score collectively as well on this topic as they should. He said the relatively smallish accounts, amount of rules involved and the potential nuances often don’t enter a money manager’s orbit that regularly.
He told WP that, for example, in some cases where the child qualifies and has RDSP contribution room, unused EAP can be moved across.
“I'm not trying to be insulting, I'm trying to challenge us all to know these rules well. The combination of an RDSP/RESP beneficiary is not something that a lot of advisors run through on a daily basis or yearly basis. We aren’t necessarily challenged by these types of questions all the time.”
If you are faced with a scenario where there’s EAP left, the subscriber also has the ability to move some of that money into their RRSP. However, if the subscriber passes away and another person becomes a subscriber, that new person can’t utilise their RRSP in the same way.
Brisebois said the emotional aspect of an RESP, even if it might be a small account, should also not be forgotten by an advisor.
“I can tell you in the eyes of a grandparent, in particular, and I say this with a smile on face, the RESPs are as important as their $2 million corporate accounts. They've got the emotional connection to help a grandchild or a child and I think if you make a big mistake in an RESP, there's a negative consequence there to the advisor, because clients view these accounts as important, regardless of size.”
If the client has run out of strategies, the grant – maximum of $7,200 a child - has to go back to the government. While that might not be the end of the world, any growth that has accumulated comes out at the subscriber’s tax rate, with an additional 20% on top. In Quebec that’s 12%, in Ontario, that’s 20%. So, if you live in the latter and are at the 50% tax rate, that’s a 70% hit on your growth.
Briseboise said: “The notion of improper planning and not being thoughtful along the way, has a negative impact at some point.”
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