A victim of a company layoff asked me if she should use the Lifelong Learning Plan provision of RRSPs to pay for tuition when going back to school on a full time basis. I immediately responded that few people use that program, and she might not want to either.
The Lifelong Learning Plan is very similar to the much more popular Home Buyer’s Plan. Instead of taking an interest free loan from your RRSP to assist in purchasing your first home, the Lifelong Learning Plan, or LLP, is used to assist you in going to (or going back to) school. You can also use it to finance the education of a spouse or common-law partner.
Under the LLP program, you can withdraw up to $10,000 from your RRSP per year if you meet the following conditions:
- You are enrolled, or have received an offer to enrol before March of the following year, at a designated educational institution.
- The program you are taking is a “qualifying education program”.
- You are enrolled on a full-time basis.
If you meet these conditions, then you do not have to pay tax on these withdrawals under the LLP program. As long as you pay the funds back to your RRSP over a period of ten years following eligibility of the program, you will never have paid interest or tax to access this money.
Normally, any money taken from your RRSP is treated as ordinary income and taxed at your Marginal Tax Rate. So for example, if you earn $150,000 in 2012 then you fall into the highest tax bracket and according to Ernst & Young’s 2012 personal tax calculator that means you are paying anywhere between 39 and 48.22 cents per dollar withdrawn depending on which province you live in. But how many people earn $150,000 per year when enrolled in school on a full time basis?
If you’ve lost your job, your income is very low. Let’s assume you have absolutely no income, not even employment insurance benefits. If you took out $10,000 from your RRSP you would have virtually no tax to pay. When making the RRSP withdrawal from your financial institution they would withhold tax and remit it to the Canada Revenue Agency (CRA) on your behalf, but once you filed your taxes for that year you would get back whatever was withheld.
By simply deregistering funds from your RRSP in a low income year, you could end up paying very little in tax because you are in a low tax bracket. (“Deregistering” means making a withdrawal that is treated like ordinary income.) You would not need to qualify the withdrawal by checking on the status of the education institution or program, and you could study part-time if you wanted to as well. You have much more flexibility.
Even better news: once you graduate and hopefully start earning more money, you can catch up on your RRSP contributions and perhaps collect some sizable refunds. In contrast, you wouldn’t receive any tax savings for repayments under the LLP program.
If you are considering the LLP program, run through a forecast of your income and taxes before making any decisions. Everyone’s situation is different, but few end up using the Lifelong Learning Plan*.
*Statistics Canada reports that from 1992 (program inception) to 2004, 1.4 million Canadians aged 25 to 64 withdrew $14.2 billion under the Home Buyer’s Plan compared to 49,000 Canadians aged 25 to 64 who withdrew $363 million under the Lifelong Learning Plan from 1999 (program inception) to 2004.
This content originally appeared in my Globe and Mail column.