Registered Education Savings Plans (RESP) for U.S. Individuals: Various Applicable Scenarios
Written by Carson Hamill CIM®, CRPC®, Associate Financial Advisor & Assistant Branch Manager & Dean Moro BComm, CIM®, Financial Advisor & Associate Portfolio Manager
The question often arises: Can a U.S. individual hold a RESP? While much has been discussed about how U.S. rules impact RRSPs, RRIFs, and TFSAs, RESPs often get overlooked. U.S. individuals should exercise caution with RESPs. These plans are popular in Canada due to government grants and tax benefits, but complications arise when the account holder is a U.S. individual, or the account holder or beneficiary becomes a U.S. taxpayer.
RESP Refresher
A Registered Education Savings Plan (RESP) is a Canadian government-sponsored savings account designed to help parents save for their child's post-secondary education. Investments within the RESP grow tax-free until the funds are used for educational purposes. Additionally, the Canadian government offers grants to encourage contributions, such as the Canada Education Savings Grant (CESG), which matches 20% of the first $2,500 contributed annually, up to a lifetime limit of $50,000 per child.
Contributions can be made by anyone—parents, grandparents, family members, and trusted friends. There is no annual contribution limit, but the lifetime contribution limit is $50,000 per child. These contributions and benefits make RESPs a practical strategy for saving for a child’s future education.
FBAR and FATCA for RESPs
RESPs may need to be reported under FBAR (Report of Foreign Bank and Financial Accounts) requirements. If the total value of all foreign financial accounts, including a RESP, exceeds $10,000 at any point during the calendar year, U.S. persons must include it on an FBAR. Consulting with a cross-border tax professional or advisor is highly recommended to fully understand the specific annual reporting requirements and obligations.
IRS Tax Reporting Requirements
For U.S. taxpayers, RESPs lose their tax-sheltered status, requiring the income and capital gains to be reported on U.S. tax returns. Two primary reporting methods exist:
- Foreign Trust Reporting: This method treats the RESP as a foreign trust, necessitating specific IRS forms.
- Taxable Brokerage Account Reporting: This method involves reporting the income annually on IRS Schedule D, with a statement indicating the RESP is treated as a taxable brokerage account.
Additional reporting may be required for investments within the RESP. Consulting a cross-border tax accountant is crucial to determine the most appropriate reporting method.
Why U.S. individuals might benefit from appointing a Canadian subscriber to a RESP
Throughout this blog, we will explore the strategy of appointing a Canadian subscriber to an RESP. This approach can assist U.S. individuals in managing specific tax complexities related to U.S. laws concerning foreign gifts and
PFIC rules. By having a Canadian subscriber—ideally not a U.S. person—act as the RESP's legal owner, potential U.S. tax implications may be reduced. This helps in potentially avoiding the classification of the RESP as a foreign trust or Passive Foreign Investment Company (PFIC) under U.S. tax laws. However, implementing this strategy requires careful consideration and professional guidance due to its intricacies.
RESP Grants for U.S. Individuals
Yes, as a U.S. individual with a RESP, you can receive government grants for the beneficiary. However, any CESGs (Canada Education Savings Grants) contributed by the government into your child’s RESP are considered taxable income for you as the U.S. parent or grandparent subscriber. This applies despite the RESP’s tax-deferred status in Canada. Without proper tax planning, receiving CESG funds could lead to double taxation.
Scenarios Involving RESPs and U.S. Taxpayers
Scenario One: U.S. Individual with a RESP while Living in Canada
The Canada-U.S. Tax Treaty does not specifically cover RESPs. While investment income within a RESP is tax-free in Canada, the U.S. does not recognize this status. American citizens or resident aliens in Canada must report and potentially pay taxes on RESP earnings on their U.S. tax returns.
As stated above a U.S. individual with a RESP can receive government grants for the beneficiary. However, CESGs (Canada Education Savings Grants) are taxable income for the U.S. parent or grandparent subscriber, despite the RESP's tax-deferred status in Canada. One potential strategy to avoid U.S. tax implications is to transfer the RESP to a Canadian family member without U.S. ties, thereby exempting the account from U.S. tax reporting requirements.
Without proper tax planning, this could result in double taxation. Consulting a tax professional knowledgeable about both countries' laws is advisable.
Scenario Two: Canadian Moving to the USA with a RESP
The RESP's tax-sheltered status applies only to Canadian residents. If the subscriber becomes a U.S. resident, they must report and pay taxes on RESP income and capital gains according to U.S. rules. Since the IRS treats RESPs as foreign trusts, significant reporting requirements ensue. Transferring the RESP to a Canadian family member before moving to the U.S. is often the most practical solution to avoid these complications.
Scenario Three: RESP Beneficiary Moves to the USA
When a RESP beneficiary becomes a non-resident of Canada, contributions cease, and eligibility for government incentives is lost. If Canadian residency is resumed, contributions and grants can recommence, but the non-resident period will not count toward grant accrual. The beneficiary must be a Canadian resident to receive RESP grants. If not, while they can still use the RESP for education, the grants must be returned to the government.
Key Considerations
Before transferring RESP ownership, it is essential to consult with a cross-border tax accountant. Transferring the RESP to another subscriber could be viewed as a taxable gift from a U.S. perspective, potentially impacting the annual gift tax limit and lifetime gift and estate tax exemption. If the new subscriber is not a U.S. person, future RESP income would no longer need to be reported on U.S. tax returns. Clarifying these details with a tax advisor ensures compliance and optimizes tax efficiency.
About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate portfolio managers with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.
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