Financing education through a Lifelong Learning Plan

One of the many changes resulting from developments in Canada’s economy over the past quarter century has been the need for, more or less, continuous learning. At one time, it was possible to set a career goal, acquire the necessary training or skills for that work and make a lifelong career in that field. It’s abundantly clear that that is no longer the reality for most Canadian workers, whatever their field of work.

In some cases, skills have been acquired to work in sectors, like the manufacturing sector, which no longer employs Canadians in the numbers it once did. In other cases, changes—especially changes in technology—have created the need to learn new skills in order to continue to work and advance in one’s chosen field. Finally, today’s economy of contract positions and part-time work means that most Canadians will change jobs and career paths several times throughout their working lives, and that some of those changes will involve a move into a different field altogether.

Whatever the circumstances or the motivator, acquiring new skills or qualifications through a return to school is expensive. And, particularly in the case of an individual who no longer has a job because of a corporate downsizing or bankruptcy, or a plant closure, money for re-training can be hard to find. One source which can be tapped to raise the necessary funds, without the need to create interest-bearing debt, is one’s own retirement savings, through a government-sanctioned program known as the Lifelong Learning Plan.

The Lifelong Learning Plan, or LLP, allows Canadians to withdraw funds from their RRSPs, without paying tax on those withdrawals, where the funds will be used to further their education, or that of their spouse. (Education costs for one’s children do not qualify for the Lifelong Learning Plan.)

 Amounts withdrawn to finance education programs must be paid back to the RRSP over a period of 10 years. Any qualifying individual can withdraw up to $10,000 in a calendar year, and can continue making withdrawals until January of the fourth calendar year after the year of the first withdrawal. So, an individual who first withdraws funds under an LLP in September of 2015 can continue to make withdrawals (assuming, of course, that there are sufficient funds within the RRSP to do so) until January 2019. The maximum amount which can be withdrawn under an LLP is $20,000.

 In order to participate in an LLP, an individual must meet four qualifying criteria and must continue to fulfill those criteria throughout the four-year period during which withdrawals take place. The conditions are, however, ones which can be fairly easily met in most cases, and are as follows:

•   the taxpayer must have an RRSP;
•   the taxpayer must be a Canadian resident:
•   the taxpayer must be enrolled (or have received an offer to enroll) as a full-time student in a qualifying educational program at a designated educational institution; and
•   if the taxpayer has made an LLP withdrawal in a previous year, the repayment period has not begun.

Some of the terminology used does require explanation. For purposes of the LLP, a qualifying education program is one that lasts at least three consecutive months and requires a student to spend 10 hours or more per week on courses or work in the program. The definition of a designated educational institution would include most Canadian community colleges or universities. A taxpayer who has a question about whether a particular educational institution does or does not qualify can obtain that information by calling the Canada Revenue Agency’s (CRA’s) Individual Income Tax Enquiries line at 1-800-959-8281.

Withdrawing funds under an LLP

In order to withdraw funds from an RRSP under an LLP, the taxpayer must complete Form RC 96, Lifelong Learning Plan (LLP) Request to Withdraw Funds from an RRSP, and provide that form to his or her RRSP issuer. Assuming that the taxpayer does qualify for an LLP under the four criteria listed above, the RRSP issuer will provide the taxpayer with up to $10,000 from the RRSP, and no withholding tax will be required on amounts up to the $10,000 limit. The issuer will provide the taxpayer with a T4RSP slip showing the amount of the withdrawal, and all such LLP withdrawals must be reported on the tax return for the year. However, even though all amounts received are reported on the return, they do not count as taxable income and no income tax is payable on those amounts. The non-taxable status of such withdrawals applies, however, only to the first $10,000 withdrawn under an LLP. Amounts withdrawn in excess of the $10,000 limit are treated as regular income and taxed as such.

Making repayments to an LLP

While everyone who has an LLP must repay amounts withdrawn over a 10-year period and must repay 10% of the outstanding balance each year, the date on which those withdrawals must commence can vary. The task of figuring out what amounts must be repaid and when is made easier by the fact that everyone who withdraws funds under an LLP receives a Statement of Account each year, after they file their tax return. That Statement of Account will show total LLP withdrawals, the LLP balance, the amounts which have been repaid to date, and the amount which must be repaid in the following year.

While the rules governing when repayments must commence can be complicated, those rules are essentially as follows. The latest date on which anyone who has an LLP must commence repayment of amounts withdrawn is the fifth year after the first withdrawal. In most cases, however, repayments must start before that date. Generally, if an LLP student is not a full-time student for at least 3 months in the calendar year for two consecutive years, repayment to the LLP must start in the second of those two years. Assuming the LLP student continues to meet that requirement, repayment can be deferred until the fifth year following the year the first withdrawal is made. The CRA provides the following example of the application of the repayment rules under each scenario.

Sarah makes LLP withdrawals from 2011 to 2014. She continues her education from 2011 to 2016, and is entitled to claim the education amount as a full-time student for at least three months on her income tax and benefit return every year. Sarah’s repayment period begins in 2016, since 2016 is the fifth year after the year of her first LLP withdrawal. The due date for her first repayment is March 1, 2017, which is 60 days after the end of 2016, her first repayment year.

Joseph makes an LLP withdrawal in 2013 for a qualifying educational program he is enrolled in during the same year. He is entitled to the education amount as a full-time student for five months of 2013. Joseph completes the educational program in 2014, and he is entitled to the education amount as a full-time student for five months in 2014. He is not entitled to the education amount for 2015 or 2016. Joseph’s repayment period begins in 2016.

Deciding whether to tap into one’s RRSP in order to finance further education involves a balancing of factors. Using RRSP funds in this way means that no interest will have to be paid on funds used for education costs, unlike more traditional borrowings, including government student loans. As well, there are no tax costs to using an LLP, assuming that any withdrawals made are within statutory limits and repayments are made on schedule and in the amounts required. On the other hand, there is a “cost” in that funds withdrawn will not, during the 10 to 15-year period starting with the first withdrawal and ending with the last repayment, be earning income inside the RRSP, so the amount available in the RRSP on retirement will certainly be less. The expectation, as with all borrowings related to education, is that the costs involved will be more than offset by greater earning capacity in the future, and consequently greater ability to save for retirement.

At the end of day, the decision of whether to participate in an LLP will come down to the individual circumstances of the taxpayer involved. In making that determination, the taxpayer will need to consider the following.

•   How much has already been saved in one’s RRSP, and what percentage of the funds saved currently in the plan will be needed for the LLP?
•   What are the job prospects and average earnings in the sector or position for which the taxpayer is being re-trained? In other words, is the investment to be made in re-training or education likely to be more than offset by the earnings which will be realized as the result of that re-training?
•   Finally, for older workers, are there enough years remaining before retirement to justify the costs and time involved in re-training? If the time needed to re-train is greater than the number of working years left after the re-training is completed, it’s likely that there are better strategies than investing significant funds in re-training costs.