Dealing With Unused RESP Funds

Posted by Bristol Capital Management 07-12-2022

The RESP is the main tool for Canadians looking to assist their children with the substantial cost of post-secondary education. Grants are provided by the government of Canada, and all investment growth in the account is tax free. However, one of the key caveats of this account is that all the funds must be used by the beneficiary for education. In this article, we will take a look at what happens when this isn’t the case, and the RESP isn’t fully utilized. 

How the RESP Works 

The RESP is an account intended to help parents support their children with the cost of education. Subscribers (parents, guardians) make contributions of $2500 annually per beneficiary (post-secondary student) and receive a $500 grant, essentially guaranteeing a 20% return. On top of this, all investment growth in the account is completely tax free. However, the account does have some important conditions. The government will only provide grants up to $7200 dollars for each beneficiary. Therefore, after a subscriber has contributed $2500 annually for 15 years, no further grants will be provided. Additionally, the funds can only be withdrawn if they are intended to pay education costs such as tuition or residence. This brings up an important question. What happens if a beneficiary decides that they don’t want to enroll in post-secondary education? Alternatively, what happens if there are leftover funds in the account once all education costs are paid? 

Unused RESP Funds 

There are 3 components of an RESP account. The contributions made by the subscriber, grants from the government, and investment growth. If there are leftover funds in the RESP, contributions made to the account can be withdrawn tax free, while grants paid into the account must be repaid in full. What happens to the investment growth portion is a little trickier, as there are several conditions that need to be met in order for withdrawals of these funds to be allowed. This portion of the account can only be withdrawn if the beneficiary is over the age of 21, not enrolled in a post-secondary program, and the RESP was opened at least 10 years prior. Even If all these conditions are met, the investment growth is no longer considered tax free, therefore upon withdrawal, this growth will be taxed as income at the subscriber’s marginal tax rate, plus an extra 20% penalty.  

Assuming you wanted to withdraw $10,000 of investment growth from the RESP and your tax rate was 40%, you would have to pay $6,000 in taxes and penalties for this withdrawal. There is one strategy to limit the amount of tax paid when withdrawing from the RESP. Up to $50,000 can be transferred from an RESP to a RRSP, meaning that you can defer the tax until your retirement, where you will likely have a lower marginal tax rate. To do this, you must have RRSP contribution room available, and you would still be required to pay a 20% penalty. 


Overall, the 20% penalty is immaterial as long as the amount leftover in the RESP isn’t significant. By working with a financial advisor and building a financial plan, you can ensure that you aren’t making excess contributions to the RESP and thus avoid any unnecessary penalty fees.  

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