The article “Will My Hard-Working Teen Have To Pay Tax On Withdrawals From Our Family RESP?” was originally published on MoneySense on June 5, 2019.

Scott is wondering how to split Registered Education Savings Plan funds between his children to minimize the tax payable on withdrawals.

Q. I have a family RESP with two children starting university in 2019 and 2020 respectively. My oldest has a good part-time job earning between $15,000 to $20,000 per year. The youngest is still searching for part-time employment.

My question is: If they continue to have significant differences in income can (or should) I request principal-only withdrawals for my oldest, and focus the Educational Assistance Payments (EAPs) and growth to be withdrawn (and taxed) in the name of my youngest? This seems to be the best way to maximize the flexibility of the family RESP and to avoid possible taxes payable by my oldest. (My advisor has been useless in actually “advising” on this!)

A. Although it sounds like you know a bit already about Registered Education Savings Plan (RESP) withdrawals, Scott, I’ll start by clarifying how the withdrawals work.

An RESP account is made up of three components: 1) your original contributions; 2) government grants deposited over the life of the plan; 3) investment income and growth.

When you take a withdrawal to fund eligible post-secondary education, you need to confirm with the financial institution if you want the withdrawal to be comprised of tax-free principal (the original contributions) or taxable amounts (government grants, or investment income and growth). The taxable amounts are called Educational Assistance Payments (EAPs), and are reported on the tax return of the beneficiary (student). The financial institution issues a T4A tax slip to report the income.

People most commonly open a family RESP account for their children, but can also open RESPs for grandchildren. A family RESP can be handy because it allows you to consolidate education savings for your children or grandchildren in a single account rather than maintaining separate individual RESP accounts for each of them.

Family RESPs also allow more flexibility with withdrawals, because the funds can be allocated among the beneficiaries in whatever proportion you like. In your case, Scott, you can have tax-free withdrawals allocated to your higher-income child, and taxable withdrawals allocated to your lower-income child.

The split of withdrawals can change from year to year, and if one of your children doesn’t need as much from the RESP as another, you can even allocate more of the family RESP to funding the higher-cost child’s post-secondary education.

In Ontario, the first $10,582 of income for 2019 is exempt from income tax due to the combined federal and Ontario basic personal amount non-refundable tax credits. Income in excess of $10,582 and up to $12,069 is generally taxed at 5.05%, and at 20.05% up to $43,906.

Students can claim a federal tax credit for tuition paid to an eligible post-secondary institution. That means if a student spent $8,000 of their earnings on tuition fees, that $8,000 would be exempt from federal income tax. There is no longer an Ontario tuition tax credit, however; it was eliminated in 2017.

For most full-time students, the combination of exemptions provided by the basic personal amount, and tuition, education, and textbook amounts tax credits eliminates any tax payable on RESP withdrawals unless they work a lot during the school year or summer. By properly planning RESP withdrawals, the split between tax-free and taxable amounts, and the allocation between your children, you can usually eliminate most or all the potential tax payable on RESPs.

In your case, Scott, let’s assume your oldest has employment income of $20,000 for 2019. Ignoring any other tax deductions or credits, they would have $1,652 of income tax payable. If they had tuition fees of $11,011 for 2019, the resulting tax credit would bring their tax owing down to zero.

If your youngest had no income, they could have up to $10,582 of taxable RESP withdrawals before they had any tax to pay.

By playing around with the allocation between your kids for the taxable and tax-free withdrawals from the RESP account, you can try to minimize tax payable for the year.

You alluded to your advisor not really advising you on this, Scott. Remember, many rank-and-0file advisors are primarily in sales roles, and the “advice” part of their job may be limited. “Advisor” is a very general term in this country. Some advisors may have excellent tax planning knowledge, but because of the loose regulation of financial advice in Canada, it can be hard to know what your advisor does and doesn’t know. It may be a good idea to validate tax advice your advisor provides with an accountant as well.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.