What Happens to an RESP if the Child Does Not Go to School?

First, check whether the plan needs any action now

A change in school plans is not the same thing as an immediate requirement to close the RESP. A beneficiary might start a qualifying program later. Under the usual federal framework, contributions can be made for up to 31 years from the plan’s opening, and the money can be used for up to 35 years. Special rules may extend a qualifying non-family plan for a beneficiary with a disability. The provider can explain the actual end date and contract terms for your plan.

Ask what happens if you stop contributing but keep the RESP open. Some plans require scheduled payments or have fees; others are more flexible. Government guidance says to check the plan agreement rather than assume that all RESPs work alike. While you decide, keep track of any fees and the account’s investment risk.

Separate the balance into three buckets

Contributions are the money put into the plan by you or others. They were not tax-deductible when paid in, and a refund of contributions is generally tax-free. Government benefits can include the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), and provincial benefits. They have their own education-use and repayment rules. Earnings are the growth on contributions and benefits; outside an eligible educational assistance payment, they can be paid only under specific rules and may be taxable.

The provider can give you a current balance for each bucket. That breakdown matters more than the overall account value when you are comparing what to do next. If another person has opened an RESP for the same child, tell the provider before arranging a beneficiary change or transfer; contributions across plans share a $50,000 lifetime limit per beneficiary.

Option one: leave the RESP available for future education

If the beneficiary has delayed a decision, leaving the plan open may preserve the possibility of eligible studies later. The federal RESP program covers more than a university degree: qualifying college, trade, apprenticeship and other post-secondary programs can count, subject to program and school rules. The provider has to check the program before it makes an educational assistance payment.

Keeping the plan open is not automatically cost-free or best for everyone. Ask about ongoing fees, required contributions, investment choices, and the contract’s maturity date. If the beneficiary later enrols, the subscriber can ask the provider about a payment for education and provide proof of enrolment.

Option two: ask about another beneficiary

Some plans allow a new beneficiary or let eligible family members share benefits. The details depend on whether the plan is an individual, family or group RESP, the relationship between children, their ages, and the government’s benefit rules. In some sibling situations, CESG may be retained or shared if the new beneficiary has grant room. The CLB belongs to the eligible beneficiary; do not assume it can simply be passed to someone else.

A beneficiary change can also create an RESP overcontribution when the new beneficiary already has a plan. The government describes limited exceptions to the usual contribution-history rule, but they are conditional. Ask the provider to calculate the grant repayment and contribution-limit effect before changing the name. Do not rely on “it’s all in the family” as the only test.

Option three: close the plan with a written breakdown

When an RESP is closed without eligible education use, the original personal contributions can normally be returned tax-free to the subscriber. Federal and relevant provincial benefits that cannot be used or transferred under the program rules go back to the government. In particular, unused CLB must be repaid; the CESG may have a qualifying sibling route, but otherwise may have to be repaid. Ask the provider to identify each benefit and explain the repayment calculation.

The remaining earnings do not become tax-free just because your contributions are tax-free. The provider may be able to make an accumulated income payment (AIP), transfer eligible earnings under a registered-plan rule, or make a payment to a designated educational institution. Each route has conditions. The CRA’s RESP payment guide explains the categories.

Understand the earnings tax before requesting an AIP

An AIP is usually a payment of RESP earnings to the subscriber, not an educational payment to the student. CRA permits one only when the plan and subscriber meet specific conditions. Among the possible timing routes: the payment is after the year containing the plan’s ninth anniversary and all living current or former beneficiaries are at least 21 and not eligible for an educational assistance payment; or it is in the year containing the plan’s 35th anniversary; or all beneficiaries are deceased. The subscriber must also meet residency and payment-recipient rules. This is why a plan cannot simply pay out earnings whenever school plans change.

An AIP is generally subject to ordinary income tax plus an additional 20% tax, or 12% for a Quebec resident. CRA uses Form T1172 for the additional tax. If the first AIP is paid, the RESP must be terminated by the end of February in the following year. Ask the provider about withholding and tax slips before agreeing to the payment.

Can earnings go to an RRSP instead?

Some eligible subscribers can reduce tax on up to $50,000 in lifetime AIPs by contributing the earnings to an RRSP, pooled registered pension plan or specified pension plan, if they have enough deduction room and meet CRA’s recipient and timing conditions. A direct transfer with Form T1171 may avoid withholding when its conditions are met. This is a route for qualifying earnings, not a way to move CESG or CLB into an RRSP. The original contributions are handled separately.

Other routes, including a rollover of eligible earnings to the same beneficiary’s RDSP, have additional disability, age, residency and plan conditions. These are worth asking about when relevant, but should not be assumed from a general article. Have the provider explain its available transaction types and use CRA’s conditions to check them.

A short question list for the provider

1. How much of this plan is contributions, each government benefit, and earnings?
2. What is the last date the plan can remain open, and what fees apply if contributions stop?
3. If I change the beneficiary, which benefits stay, which are repaid, and could the new beneficiary exceed their contribution limit?
4. If I close it, what will I receive tax-free, what benefits will be repaid, and do I qualify for an AIP or a transfer of earnings?
5. Which forms, tax slips, withholding amounts, and deadlines would this particular transaction involve?

Ask for the answer in writing. That gives you something concrete to check against the official rules before the money moves.