How to Close an RESP When the Beneficiary Does Not Use the Money for School

You do not have to close the RESP immediately

If the beneficiary decides not to attend post-secondary school, the Government of Canada identifies four broad options: keep the RESP open, replace the beneficiary, transfer the money to another eligible plan, or close the RESP.

This matters because an RESP can remain available if the beneficiary later returns to school. Under the Income Tax Act rules, most RESPs must be terminated by the end of the year containing the 35th anniversary of the year the plan was opened. Certain specified plans for a beneficiary with a disability can qualify for a longer period.

If the beneficiary later attends an eligible post-secondary program, the rules for withdrawing education money are different. See Helpydo's guide to withdrawing money from an RESP for post-secondary education.

What happens to the money you contributed?

Your personal RESP contributions are different from government grants and investment earnings. CRA states that, subject to the RESP contract, a promoter can return contributions to the subscriber when the contract ends or earlier.

A refund of your contributions is not taxable. The promoter does not issue a T4A for a simple refund of contributions, and you do not include that refund as income on your tax return.

What happens to unused CESG, CLB and provincial incentives?

When an RESP closes without the government education benefits being used as permitted, those benefits are generally repaid to the appropriate government. The Government of Canada states that money received from benefits is returned to the federal government or to the applicable provincial government when the plan closes.

The Canada Learning Bond cannot be paid to the subscriber simply because the beneficiary did not use it for education. Unused CLB must be returned to the Government of Canada.

Unused CESG may sometimes be preserved before closure by changing beneficiaries or transferring an RESP under the applicable sibling and grant-room rules. Ask the promoter to check the consequences before instructing it to close the plan.

What happens to the investment earnings?

Investment income remaining in the RESP is called accumulated income when it is distributed outside the normal education-payment route. When closing the plan, the federal government lists several possible ways accumulated income may be handled:

• paid to an eligible subscriber as an Accumulated Income Payment (AIP);
• transferred to an eligible RRSP of the subscriber or the subscriber's spouse or common-law partner;
• rolled over to the beneficiary's eligible RDSP;
• paid to a designated educational institution in Canada.

Your RESP contract must allow the chosen option, and federal eligibility rules apply. Contact the promoter before making the closure request.

When can you receive an Accumulated Income Payment?

An RESP may allow an AIP only when federal conditions are met. The payment must generally be made to or for a subscriber who is resident in Canada, and it must be made to one subscriber rather than jointly to multiple subscribers.

At least one of the following must also apply:

• the payment is made after the year containing the RESP's ninth anniversary, meaning the plan has effectively existed for at least 10 years, and every living individual who is or was a beneficiary has reached 21 years of age and is not currently eligible for an Educational Assistance Payment;
• the payment is made in the year in which the RESP is required to terminate; or
• all beneficiaries under the RESP are deceased.

CRA may waive the age and plan-duration conditions where it is reasonable to expect that a beneficiary cannot pursue post-secondary education because of a severe and prolonged mental impairment. The RESP promoter must make that request to CRA.

How is a cash AIP taxed?

A cash AIP is generally subject to regular income tax plus an additional tax of 20%. The additional tax rate is 12% for residents of Quebec.

The promoter reports the AIP on a T4A slip. You include the AIP in income for the year received. CRA requires Form T1172, Additional Tax on Accumulated Income Payments from RESPs, when calculating the additional tax.

The additional tax is separate from your normal marginal income-tax rate, which is why reviewing rollover options before receiving a cash AIP can be important.

Can you transfer RESP earnings to an RRSP instead?

Some subscribers can reduce or eliminate the additional AIP tax by contributing eligible AIP amounts to an RRSP, PRPP or specified pension plan, or to certain plans of a spouse or common-law partner.

The reduction is subject to a $50,000 lifetime maximum and available deduction room. CRA states that the contribution must generally be made in the year the AIP is received or within the first 60 days of the following year, and your available deduction limit must allow you to deduct the contribution.

How Form T1171 can prevent tax withholding

If the eligibility rules are met, you can complete Form T1171, Tax Withholding Waiver on Accumulated Income Payments from RESPs, and ask the RESP promoter to transfer the qualifying amount directly to the registered retirement plan. This can allow the promoter not to withhold tax on the transferred amount.

Do not assume that every RESP subscriber qualifies. CRA limits this relief to specified subscribers or successors, and sufficient RRSP or other applicable deduction room is required.

Can unused RESP earnings go to an RDSP?

A tax-deferred education savings rollover may be possible when the RESP beneficiary is also the beneficiary of the RDSP and the other federal requirements are met.

One of the RESP-side conditions must apply: the beneficiary has a severe and prolonged mental impairment that prevents post-secondary study, the RESP has existed for at least 10 years and each beneficiary is at least 21 and not eligible for an EAP, or the RESP has existed for at least 35 years.

At the time of the rollover, the beneficiary must also meet RDSP requirements including being eligible for the Disability Tax Credit, being 59 or younger at the end of the year, being resident in Canada for tax purposes and remaining within the RDSP's $200,000 lifetime contribution limit.

The RESP promoter uses Form RC435 for the rollover. The RESP contributions are returned to the subscriber, remaining CESG, CLB and applicable provincial incentives are repaid, and the RESP must be closed by the end of February of the following year.

AIP payments create a specific closure deadline

You do not need to close an RESP merely to receive the first AIP, but once an AIP has been made, federal rules require the RESP to be terminated by the end of February of the year following the year in which the first AIP was paid.

An RESP that has already made an AIP also cannot later transfer its property to another RESP. If transferring to another RESP is a possible alternative, discuss that option with the promoter before taking an AIP.

Could transferring the RESP be better than closing it?

Possibly. CRA permits transfers between RESPs when the applicable conditions are met. Transfers can preserve registered savings and, in qualifying circumstances, avoid repayment consequences that would arise from simply closing the plan.

Federal guidance states that many transfers have no tax consequences when the transferring and receiving plans have the same beneficiary or when the applicable sibling rules are met. However, promoters can have contractual transfer fees, and transferring government incentives requires compliance with Canada Education Savings Program rules.

If the RESP has already made an AIP, a later transfer from that RESP is not permitted.

How do you close the RESP?

There is no single federal government application that subscribers submit directly to CRA to close an ordinary RESP. The RESP promoter, usually a bank, credit union, investment company or scholarship-plan organization, administers the closure.

1. Contact the promoter and tell it that you are considering closing the RESP.
2. Ask for a current breakdown of contributions, government incentives and accumulated earnings.
3. Review alternatives such as a beneficiary change, RESP transfer, RRSP transfer or RDSP rollover before authorizing closure.
4. Confirm which incentives the promoter must repay to the federal or provincial government.
5. Give the promoter instructions for returning personal contributions and distributing eligible accumulated income.
6. Complete any promoter forms and CRA forms required for the option you select.
7. Keep the final account statement and any T4A or tax forms for your records.

Is there a fee or standard processing time?

The federal government does not publish a government closing fee or a standard processing time for closing an RESP. Your promoter's contract controls the administrative process and may include conditions, transfer charges or other plan-specific fees.

Ask for those costs and the expected timeline before authorizing closure, especially with group or scholarship RESPs where contractual terms may differ from ordinary individual or family plans.

Common mistakes to avoid

• Closing the RESP immediately without checking whether the beneficiary may study later.
• Assuming unused CESG or CLB can simply be withdrawn by the subscriber.
• Taking a cash AIP without understanding the regular income tax and additional 20% or 12% tax.
• Receiving an AIP before considering a transfer to another RESP, because an RESP cannot make that transfer after an AIP has been paid.
• Assuming an RRSP rollover is automatically tax-free without sufficient deduction room.
• Missing the end-of-February closure deadline after the first AIP.
• Trying to roll earnings into an RDSP without confirming DTC, age, residency and common-beneficiary requirements.
• Ignoring plan-specific fees or contractual conditions imposed by the RESP promoter.

What happens after the RESP is closed?

Keep the promoter's final statement showing how contributions, government incentives and earnings were distributed. If you received an AIP, retain the T4A and the records needed to report the payment on your income tax and benefit return.

If you used an RRSP-related reduction of AIP tax, keep Form T1171, RRSP contribution documentation and the information required to claim the corresponding deduction. If additional AIP tax remains payable, complete Form T1172 with your tax return.