Written on February 21, 2013 – 7:30 am | by Corina Weigl
It’s the goal of all parents for their kids to go on to complete a post-secondary education. In anticipation of this, parents start saving for their kids’ education early on – often starting from the year they are borne. For Canadian resident taxpayers doing so is easier, from a Canadian income tax perspective, if one does so through a Registered Education Savings Plan (RESP). If, however, you are also a US citizen or green card holder (referred to as a US person) that is resident in Canada, not only may you have added reporting obligations to Uncle Sam, but He may be dipping his hand into your kids’ RESPs to help fund his own.
For Canadian tax purposes one of the advantages of an RESP is that income that’s earned in an RESP is not taxable to the contributor in the years it is earned. Rather, the income is taxed in the hands of the child when it is withdrawn and then taxed at their (presumably) lower tax rates. If, however, the contributor is a US person, they may have to include the income in their taxable income for US income tax purposes in the years the income is earned. Unfortunately the difference in the timing of when the income is taxed and in whose hands, may lead to double tax.
Added to this unfortunate tax result, if the RESP qualifies as a foreign trust for US income purposes there may be rather challenging interest charges imposed on income that is accumulated in the RESP, when it is later withdrawn and paid to the contributor’s kids.
The upshot for those US persons who reside in Canada – pay attention to the US tax consequences of setting up an RESP for your kids. Uncle Sam’s long-arm may mean the tax benefits aren’t quite what you anticipated.