Here is a question from Pam.
I contributed to my daughter’s RESP for 10 years and I was told RESP contributions are not tax deductible. My daughter started college in 2010 Sept and she withdrew some money from RESP for college expenses. She has received a T4A. Why does she has to pay taxes on the withdrawal as I did not get any deduction when we contributed?
Answer: Yes, you are correct that RESP contributions are not tax deductible. She is not paying taxes for withdrawing the contribution you made. She is paying taxes on withdrawing Canada Education Savings Grant(CESG) and income earned (income earned on grant and contribution) over the years.
Lets look at a simple example. Father contributed $2,000 to son’s RESP and received $400 CESG. Over the years that contribution and grant earned $500 income. When the son decided to withdraw funds from the plan, the balance was $2,900 ($2,000 contribution+$400 CESG +$500 income). Son withdrew the full balance and he will receive a T4A for $900.00 (CESG+ income earned). Usually beneficiary’s income level is low and in addition beneficiary will have tuition and education credits and will not pay any tax on the income from T4A.