Accumulated Income Payments (AIP): Definition, Taxation, and Strategies
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Summary:
Accumulated income payments (AIP) refer to withdrawals from Canadian Registered Education Savings Plans (RESPs) when beneficiaries opt out of post-secondary education. Tax implications include regular income tax rates plus additional federal penalty taxes if taken as cash. Strategies to avoid taxation include rolling over AIPs into RRSPs or keeping the RESP open for up to 36 years. Specific criteria must be met to retain accumulated returns under certain conditions.
Understanding accumulated income payments (AIPs)
An RESP, akin to a U.S. 529 plan, allows tax-free growth of college savings until withdrawal. Typically managed by parents, guardians, or grandparents, an RESP can accommodate contributions from various sources.
What are accumulated income payments?
AIPs represent withdrawals from RESPs, encompassing investment earnings, when beneficiaries opt out of post-secondary education or no suitable beneficiary is designated.
Tax implications of AIPs
When withdrawn as cash, AIPs are subject to taxation, entailing regular income tax rates plus an additional federal penalty tax of 20% (or 12% in Quebec). Only the interest or investment gains within the RESP are subject to taxation, not the principal contributions.
Options to avoid taxation
To mitigate tax consequences, subscribers may opt to roll over up to $50,000 of AIPs into RRSPs or spousal RRSPs, provided there is available contribution room. Alternatively, keeping the RESP open for up to 36 years can help retain its full tax benefits.
Special considerations
If an RESP beneficiary opts against attending an accredited university, the subscriber can retain accumulated returns under specific conditions:
Criteria for retaining returns
- The plan holder must be a Canadian resident at the time of withdrawal.
- The RESP must have a minimum age of 10 years.
- The beneficiary must be at least 21 years old.
- Accumulated income payments can also be made in the event of the beneficiary’s demise.
Exclusions from AIPs
Not all transactions within an RESP qualify as AIPs; exemptions include educational assistance payments, contributions to Canadian schools, refunds, transfers, and repayments under specific educational savings programs.
Frequently asked questions
Can AIPs be rolled over into other investment accounts?
Yes, AIPs can be rolled over into Registered Retirement Savings Plans (RRSPs) to defer taxation or utilized to fund a spousal RRSP if contribution room permits.
Is there a limit to the amount of AIPs that can be rolled over into an RRSP?
Yes, the maximum amount that can be rolled over into an RRSP is $50,000, subject to available contribution room.
Can I roll over AIPs into a tax-free savings account (TFSA)?
No, AIPs cannot be rolled over into a TFSA. Only RRSPs or spousal RRSPs are eligible for rollover.
What happens to the remaining RESP balance if the subscriber passes away?
If the subscriber passes away, the remaining RESP balance may be transferred to another subscriber, such as a successor subscriber or the beneficiary’s legal representative. Alternatively, the RESP can be collapsed, and any accumulated income can be paid out as AIPs, subject to taxation.
Key takeaways
- Accumulated income payments (AIP) are withdrawals from Canadian Registered Education Savings Plans (RESPs) when beneficiaries opt out of post-secondary education.
- AIPs are subject to taxation, including regular income tax rates plus additional federal penalty taxes if taken as cash.
- Strategies to mitigate tax consequences include rolling over AIPs into RRSPs or keeping the RESP open for up to 36 years.
- Specific criteria must be met to retain accumulated returns, such as the plan holder being a Canadian resident, the RESP being at least 10 years old, and the beneficiary being at least 21 years old.
- Exclusions from AIPs include educational assistance payments, contributions to Canadian schools, refunds, transfers, and repayments under specific educational savings programs.
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