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According to the Income Tax Act (Canada), educational assistance payments (EAPs) are taxed in the beneficiary’s hands, meaning these payments will be added to your child’s income for the year they are received. However, since students benefit from lower tax rates, they usually pay little or no tax on these amounts.
A smart strategy to ensure the beneficiary pays little or no tax is to spread EAP withdrawals over several fiscal years. In addition to reducing your child’s taxable income, you ensure RESP funds are available throughout your child’s school career.