What Happens to an RESP If Not Used for Education?

If the child named on your Registered Education Savings Plan doesn’t pursue post-secondary studies, what happens to an RESP not used for education comes down to four choices: name a different beneficiary, roll the growth into your RRSP, cash the plan out, or donate the earnings to a Canadian school. Your original contributions always come back to you tax-free. Any government grants inside the plan always go back to Ottawa. And no matter what you decide, the account has to close by the end of its 35th year.

Name a Different Beneficiary First

Switching beneficiaries is usually the cleanest option because it preserves the grants and the tax shelter. In a family RESP, every beneficiary must be connected to you by blood or adoption, and you can add or swap names within that group without disturbing the plan. A younger sibling who still plans to attend college, university, or a trade program is the typical replacement.

You can also transfer funds from one RESP to another. Transfers generally carry no tax consequences when the two plans share a common beneficiary, or when a sibling of a beneficiary under the old plan is named on the new one. For individual (non-family) RESPs, the sibling on the receiving plan must have been under 21 when that plan was opened.¹ When a sibling becomes the new beneficiary, the Canada Education Savings Grant and Canada Learning Bond amounts usually stay in the plan instead of being clawed back.

A botched beneficiary change can trigger immediate grant repayment and tax on the earnings, so confirm with your RESP provider that the new beneficiary meets the specific conditions before anything is processed.

Roll the Growth Into Your RRSP

If no one in the family will use the plan for school, you can move the investment growth into your own retirement savings through what’s called an Accumulated Income Payment, or AIP. The lifetime cap on this rollover is $50,000.¹ The AIP can go into your RRSP, a pooled registered pension plan, or a specified pension plan, and you need enough deduction room to absorb it.

Three conditions must all be met. The RESP must have been open for at least 10 years. Every named beneficiary must be at least 21. And no beneficiary can currently be eligible for educational assistance payments.² Miss any one, and the rollover isn’t available.

The rollover must happen in the year you receive the AIP or within the first 60 days of the year after. Check your RRSP deduction limit on your latest Notice of Assessment first. Over-contributing carries its own penalty, and growth above the $50,000 cap will be taxed as a direct withdrawal regardless.

Withdraw the Money Directly

Your original contributions come back tax-free. You already paid income tax on that money before depositing it, so the Canada Revenue Agency doesn’t tax it again.

The earnings are a different story. Investment growth withdrawn when the beneficiary isn’t using the plan for education comes out as an Accumulated Income Payment. Two layers of tax apply: regular income tax at your marginal rate, plus an additional 20% under Part X.5 of the Income Tax Act. Quebec residents pay 12% instead of 20% for the additional portion.³ The same AIP conditions apply as with the RRSP rollover: 10-year-old plan, beneficiaries 21 or older, none eligible for educational assistance payments.²

The combined bite is steep. A subscriber in a 50% marginal bracket outside Quebec would lose roughly 60% of the earnings to income tax and the additional tax together. Your financial institution withholds the taxes before releasing the balance, so what lands in your account is already net of both charges. Most people who go this route wish they had looked harder at the RRSP rollover first.

Donate the Earnings to a Canadian School

A less familiar option lets you avoid the 20% additional tax entirely. If you transfer the RESP’s investment growth to a qualifying post-secondary institution in Canada, that donation is not subject to the additional tax. The school may also issue you a charitable donation receipt that can offset part of your regular tax bill. This only makes financial sense if the tax savings from the donation credit outweigh what you’d otherwise keep in your pocket after a direct withdrawal, so run the numbers with an accountant before committing.

The Grants Go Back to the Government

The Canada Education Savings Grant and Canada Learning Bond were never yours to keep. Ottawa contributes those amounts on the condition that they fund a beneficiary’s education. The basic CESG matches 20% of your annual contributions on the first $2,500, up to $500 per year and $7,200 over a beneficiary’s lifetime.⁴ Lower-income families may have received an additional CESG of 10% or 20% on the first $500 contributed each year, plus the Canada Learning Bond.

If no beneficiary uses the plan for a qualifying program and you close it or take an AIP, your financial institution must return the full grant balance to the Receiver General.⁵ It happens automatically during withdrawal. Provincial education incentives held in the plan are returned the same way. If $7,200 of CESG has accumulated, the whole amount leaves before you see a dollar of what’s left. The main way to keep those grants working is to put a sibling on the plan who will actually attend school.

The 35-Year Deadline

Every RESP has a hard shut-off. The plan must be closed by December 31 of the year that includes the 35th anniversary of when it was opened.² Open the account in 2005, and it has to be wound down by December 31, 2040. One exception: a specified plan for a beneficiary who qualifies for the disability tax credit gets an extension to the 40th anniversary.

Once the deadline hits, the account loses its tax-sheltered status and everything is distributed. Contributions come back tax-free, grants go back to Ottawa, and any remaining earnings are taxed as an AIP if you haven’t dealt with them. Letting the clock run out means you lose all flexibility, so start working through your options well before the 35-year mark, especially if the beneficiary has shown no interest in post-secondary education by their mid-twenties.

An Extra Warning for US Persons

US citizens and US residents who hold a Canadian RESP face problems Canadian-only residents don’t. The IRS treats a Canadian RESP as a foreign trust, and the Canada-US tax treaty relief that shelters RRSPs and RRIFs does not extend to RESPs.⁶⁷ A US subscriber is generally treated as the owner of a foreign grantor trust and owes US income tax each year on the income earned inside the plan, including income earned on the Canadian grants, even before anything is withdrawn.

Holding the plan can trigger annual FBAR filings, Form 3520, and Form 3520-A, with penalties for missed filings starting at the greater of $10,000 or 35% of the reportable amount and climbing from there.⁸ And when you eventually pay the Canadian 20% additional tax on an AIP, the IRS treats it as ineligible for the foreign tax credit, so US persons effectively absorb that surtax with no US offset.⁹ If you’re a US person with a Canadian RESP that won’t be used for school, talk to a cross-border tax specialist before you take any of the steps above.

1
Canada Revenue Agency. Registered Education Savings Plans Payments, Transferring and Closing
2
Justice Laws Website. Income Tax Act – Section 146.1
3
Canada Revenue Agency. RESP – Accumulated Income Payments
4
Canada Revenue Agency. Canada Education Savings Grant (CESG)
5
Justice Laws Website. Canada Education Savings Regulations (SOR/2005-151)
6
Internal Revenue Service. United States – Canada Income Tax Convention
7
Internal Revenue Service. Instructions for Form 3520-A (Rev. December 2025)
8
Internal Revenue Service. Failure to File the Form 3520/3520-A Penalties
9
Internal Revenue Service. Instructions for Form 1116 (2025) – Foreign Tax Credit