What Is an Accumulated Income Payment (AIP)?
Accumulated income payments (AIP) refers to funds withdrawn from a Canadian Registered Education Savings Plan (RESP) if the beneficiary decides not to attend college. In this case, the returns generated in the RESP aren't forfeited as long as the subscriber fulfills certain criteria.
- Accumulated income payments are funds withdrawn from a Canadian RESP if the beneficiary decides not to attend college.
- Returns generated in an RESP aren't forfeited as long as the subscriber fulfills certain criteria.
- If taken as cash, AIPs are taxable income and subject to the regular income tax rate plus an additional federal penalty tax of 20%, or 12% in Quebec.
- To avoid taxation, the subscriber can roll over as much as $50,000 into an RRSP or keep it open for as long as 36 years.
Understanding Accumulated Income Payments (AIPs)
An RESP is the equivalent of a U.S. 529 plan. It allows savings for college to grow tax-free until the money is withdrawn, at which time taxes on withdrawals tend to be low or nonexistent because students typically have little to no income. The majority of RESP account holders are parents but in some cases, grandparents, guardians, or friends of the family can also set up an account.
As noted above, AIPs are amounts paid back to the subscriber of an RESP including any money earned on the investment. Subscribers can make these withdrawals if the beneficiary decides not to pursue post-secondary education or if there is no other suitable beneficiary named.
If taken as cash, AIPs are taxable income and are subject to the taxpayer's regular income tax rate plus an additional federal penalty tax of 20%, or 12% in Quebec. The amount of money contributed to an RESP will not be taxed, just the interest earned or investment gains. Anyone who makes a withdrawal receives a T4A tax slip in order to report the income on their annual tax return. The RESP must be terminated by the end of February of the following year once an AIP is made.
As much as $50,000 of an AIP can be rolled into a Registered Retirement Savings Plan (RRSP) or a spousal RRSP if there is contribution room using Canada Revenue Agency Form T1171. Another option to avoid the tax penalties is substituting another beneficiary such as a younger sibling who plans to attend college.
To avoid the tax penalty and retain the full tax benefits of the savings, the sponsor can keep the RESP open for a certain period of time—for as long as 36 years. This helps if the beneficiary decides to attend college at a later date.
As mentioned above, if an RESP's beneficiary chooses not to go to an approved university, the plan subscriber doesn't have to forfeit any of the returns accumulated by the account provided the following criteria are met:
- The plan holder is a resident of Canada at the time of the withdrawal
- The RESP is at least 10 years old
- The beneficiary is 21 years of age or over
- If the beneficiary is deceased
Accumulated income payments can also be made if the beneficiary is deceased.
The following are not included in accumulated income payments:
- educational assistance payments
- payments to a school within Canada
- contribution refunds to the beneficiary or the RESP plan holder
- any transfers to a different RESP
- repayments under the Canada Education Savings Act or another provincial program
Another key point to note is that accumulated income payments are not allowed under all types of RESPs.