Registered education savings plans are a great way to save for a child’s postsecondary education. Not only do RESPs let your savings grow tax-free until the child enters school, but the federal government kicks in the Canada Education Savings Grant (CESG) worth up to $500 annually per beneficiary.
But RESPs are also among the most complex accounts ever invented, with myriad rules and restrictions that sometimes baffle parents – especially when it’s time to make withdrawals. As we’ll see, even financial institutions have been known to bungle the process.
With the new school year around the corner, I offer the following examples from readers as cautionary tales. As with everything else in personal finance and investing, it’s important to educate yourself so that you can avoid pitfalls and catch mistakes when they happen.
My daughter will be starting her fourth year of university in September. After she finished her third year in April, I asked my bank to withdraw my $58,500 of RESP contributions from the account. At the time, the RESP also held $5,188.13 of Canada Education Savings Grants (CESG) and $39,880.42 of accumulated investment income, for a total of $103,568.55. To my surprise, the bank said it was required to return the CESG to the federal government. As a bank employee explained in an e-mail: “Depending on the amount you have contributed to an RESP, the government gives you grants as an incentive to continue to save for a child’s education. As you are now withdrawing your contribution, the government takes back the grants they had given you.” On top of that, I have so far received less than $51,000 of the $58,500 of contributions that I requested. Did the bank act correctly?
Based on the information you provided, it looks like the bank screwed up. Big time. Let’s make one thing clear: If the RESP beneficiary is enrolled in a qualifying postsecondary program, as your daughter is, you as the plan subscriber are entitled to withdraw all or part of your contributions without having to repay any CESG to which the beneficiary is entitled. What’s more, withdrawals of contributions are always tax free, regardless of the beneficiary’s enrolment status.
Now, there are circumstances in which a withdrawal of RESP contributions does trigger a repayment of CESG, such as when more than six months have passed since the beneficiary ceased being enrolled in school. However, this situation does not apply to your daughter. Given that the bank employee offered no other explanation for repaying the CESG, I can only surmise that he did not understand the rules.
As for why you did not receive the full $58,500, this is a mystery. As I mentioned, you are entitled to withdraw your RESP contributions tax-free at any time, and you should have received the full amount whether your daughter was attending school or not.
My advice is to file a written complaint with the bank branch manager. Ask that the CESG to which your daughter is entitled be restored (it’s up to the bank to work things out with the federal government) and the full balance owing on your $58,500 withdrawal be transferred to you immediately. You should also obtain a proof of enrolment from your daughter’s university – this should be available through your daughter’s online student portal – and attach it to your e-mail, explaining that no CESG should have been repaid to the government given her status as a full-time student. Be polite, but firm, and get everything in writing.
If your problem is not resolved promptly, escalate your complaint through the proper channels. All banks have a complaints process that you can read about by doing an internet search using the bank’s name and “how to make a complaint.” It’s possible that there is more to this story that I am not aware of, and that there may be a good explanation for what happened. But it does not smell right. Please keep me posted on your progress.
I contributed to my daughter’s individual RESP at my bank each year as she was growing up and received the maximum CESG totaling $7,200 over that period. I have been drawing down the RESP to fund her university education for the past few years, using a combination of contribution withdrawals and educational assistance payments (EAPs), which consist of government grants and investment earnings. Having withdrawn all the money in the account recently, I was surprised to get a letter from the federal government stating that my daughter received $7,521 in CESG payments and that I now need to repay the excess of $321. Was this a mistake? It may be relevant that part of the RESP was invested in guaranteed investment certificates and part in mutual funds, which are managed by different divisions of the bank.
Again, it appears somebody goofed here.
First, some background about CESG overpayments: With a family RESP that has two or more beneficiaries, it is possible for one beneficiary to inadvertently exceed the $7,200 CESG limit, with the excess having to be repaid to the CRA. That’s because a family RESP has one pooled CESG balance that can be shared among beneficiaries. Because of the default formula financial institutions use to calculate the percentage of earnings vs. CESG in an EAP, one beneficiary could max out his or her $7,200 CESG and unintentionally dip into the other beneficiary’s grant money, pushing the first beneficiary over the $7,200 limit. To avoid this, the RESP subscriber can ask the bank to tweak the proportion of earnings vs. CESG in the EAP to prevent one beneficiary from exceeding the $7,200 limit.
But that’s not the case here. You have an individual RESP with one beneficiary, your daughter. When you were contributing to her RESP, she was entitled to receive a maximum of $7,200 in CESG. Yet, now that you are making withdrawals, the bank allocated a total of $7,521 of CESG to her. In other words, the bank “withdrew” $321 of grant money that shouldn’t have even been there in the first place.
As you indicated, it’s possible that the problem arose because her investments were managed by different divisions of the bank, and the left hand may not have known what the right hand was doing. However, the bank should have kept a running total of the overall CESG balance and not pushed your daughter over the $7,200 limit.
As I said to the first reader, it’s possible that there is another explanation for what happened, but this looks like a mistake. You should take your complaint to the bank manager, in writing, and then escalate it if the problem is not resolved. Let me know how you make out.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl