“Whether assets in an RESP are the property of the subscriber or are held in trust for a beneficiary has not been consistently answered in the caselaw: See Kira Domratchev, “Is an RESP a Trust? …And So What If It Is?” (May 2021) 40 Est. Tr. & Pensions J. 257; Charles Wagner & Mari Maimets, “Litigation and RESPs”, 20th Annual Estates and Trusts Summit, October 16, 2017.
Before briefly reviewing the case law, I will describe the features of an RESP:
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- The basic framework for an RESP is established under the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (“ITA”).
- An RESP is a contract between an individual (“the subscriber”) and an organization (“the promoter”) designed to help parents, family, and friends to save towards a beneficiary’s post-secondary education: Canada Revenue Agency, Information Circular No. IC93-3R2, Registered Education Savings Plans, May 4, 2016 (“CRA Circular”), page 2; ITA, s. 146.1 (1).
- Under the contract, the subscriber names one or more beneficiaries and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments to the beneficiaries. The subscriber’s contributions are not deductible from their income tax.
- Aside from helping a child finance their cost of post-secondary education, the benefits of an RESP are that: (1) taxes on income earned on contributions are deferred until the income is withdrawn, and (2) federal government grants are paid on contributions made to an RESP.
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- Various government grants and incentives are available. A basic Canada Education Savings Grant (“CESG”) of 20% on the first $2,500 of annual RESP contributions is paid into the RESP under the Canada Education Savings Act, S.C. 2004, c. 26(“CESA”).
- An RESP is a vehicle designed for individuals to accumulate income for post-secondary education.
- The only permissible payments out of an RESP are:
o Subject to the terms and conditions of the RESP, the promoter can return contributions to the subscriber or to the beneficiary at any time.
o Educational Assistance Payments (which does include a refund of contributions but does include the RESP’s accumulated investment earnings (earnings on the money saved in the RESP) and CESGs) can be paid to or for the beneficiary student to help finance the cost of post-secondary education if the student is enrolled in a post-secondary educational institution or other qualifying educational program or if the beneficiary student is at least 16 years old and is enrolled in a specified educational program.
o Accumulated income payments (“AIPs”), which are investment earnings that accumulate on contributions made to a RESP and on amounts paid under the CESA, can be paid to a subscriber if the beneficiary is 21 years old and is not pursuing post-secondary education and the plan has been in existence for at least ten years. AIPs must be included in the subscriber’s income for the year the payments are received. The payments are subject to a 20% additional tax on top of the regular tax rate payable on the subscriber’s income. The subscriber can reduce or eliminate this additional tax by contributing the AIPs to his or her RRSP or to a spousal RRSP up to a maximum of $50,000.00.
o Repayment of amounts under the CESA: See section 11 of the Canada Education Savings Regulation, S.O.R./2005-151.
o Payments to a designated educational institution and payments to a trust to accommodate transfer of property between RESPs.
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- Any amount received by a taxpayer in satisfaction of a subscriber’s interest under an RESP must be included in computing the taxpayer’s income except:
o Any amount received in satisfaction of a right to a refund of payments under the plan: ITA, ss. 146.1 (7.1)(b), 146.1 (7.2)(b)(ii).
o Any amount received by a taxpayer under a court order or agreement relating to a division of property between the taxpayer and the taxpayer’s spouse or common-law partner in settlement of rights arising out of, or on the breakdown of, their marriage or common-law partnership: ITA, ss. 146.1 (7.11)(b), 146.1 (7.2)(b)(iii).
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- The subscriber of a plan can change the named beneficiary under an RESP if the terms of the plan allow: CRA Circular, paras. 74-75.
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- If a subscriber dies, their estate may continue the RESP or name another individual as an alternate subscriber. The terms of the RESP and provincial law will dictate what happens to the RESP: CRA Circular, para. 8.”