Lifelong Learning Plan

What Is the Lifelong Learning Plan?

Lifelong Learning Plan refers to a provision applicable to the Canadian Registered Retirement Savings Plan (RRSP). The plan allows RRSP contributors a non-taxable temporary withdrawal of up to $20,000 from their accounts in order to finance their education or that of their spouse or common-law partner (CLP). The provision is subject to limitations, such as a $10,000 annual withdrawal limit and a maximum repayment period of 10 years, after which the ability to recontribute the borrowed sum is lost.

Understanding the Lifelong Learning Plan

The Lifelong Learning Plan is part of Canada's RRSP and nominally a retirement savings plan, to which policyholders, spouses, and CLPs can contribute deductible amounts that can be used to reduce their tax burden. "Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan," according to the Canadian government.

But the registered retirement savings plan has certain other perks, such as the Home Buyer's Plan, which allows plan holders to withdraw from their RRSPs to buy or build a qualifying home. A budget increase in 2019 raised the withdrawal limit from $25,000 to $35,000 for those withdrawals after March 19, 2019, as long as those who apply are eligible.

Likewise, the Lifelong Learning Plan allows Canadians to make withdrawals from their RRSPs to finance their education without losing the benefits of tax-deferral while also building their retirement nest egg.

It's important to note, however, that this allowance is only for the individuals holding the retirement accounts, or their spouses or CLPs. "You cannot participate in the LLP to finance your children's training or education, or the training or education of your spouse's or common-law partner's children," the government specifies.

Advantages and Disadvantages of the Lifelong Learning Plan

Writing in MoneySense, Gail Vaz-Oxlade argues that the Lifelong Learning Plan can be an effective means of saving for education and improving earning potential:

The Lifelong Learning Plan (LLP) gives you an interest-free loan from your RRSP, or from your spouse’s RRSP, up to $10,000 a year (to a maximum of $20,000 in total, or $40,000 in total if both members of a couple are going back to school) to finance full-time training at a qualifying school. To take the money out of the RRSP, you must be enrolled in a school that qualifies for the education tax credit or have received a written offer to enroll and have enrolled by March of the following year. To qualify the program you choose must run for at least three consecutive months, and you must spend at least 10 hours a week on course work.

Vaz-Oxlade also noted the following: "You can use the LLP as many times as you want, as long as you have paid back the last loan before you try to tap your RRSP again. This makes it perfect for ongoing skills development and training."

But in the Globe and Mail, Preet Banerjee notes that LLPs are not widely used in Canada, lagging Home Buyer's Plans in popularity. And he suggested there may be a reason for that. Banerjee explains: "If you've lost your job, your income is virtually zero. 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."

Banerjee also notes that, in making the RRSP withdrawal, a financial institution "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."

Deregistering Funds

By deregistering funds — making a withdrawal that is treated as ordinary income — from an RRSP during a low-income year could mean policyholders "end up paying very little in tax because you are in a low tax bracket," Banerjee added.

Banerjee also suggests that anyone considering a Lifelong Learning Plan should try to make a forecast of their income and taxes before making the decision:

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. 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.