In the past I have blogged about the challenges of being a US citizen taxpayer. See ‘Keeping Your “Accidentally American” Status’ dated May 3, 2015. I’d like to revisit this topic in today’s blog. Let me provide some background.
Registered Education Savings Plans – RESPs as they are commonly referred to – are a financial product that are designed to provide Canadian taxpayers with tax benefits when saving for the post-secondary educational costs of, in general, their children. In particular, while the tax rules do not provide for a deduction for contributions made to an RESP, after the contributions are held within an RESP the investment income earned on the contributions accumulates on a tax-deferred basis. Ultimately when there are distributions made from the RESP, in the form of “educational assistance payments”, for the children of the contributor, taxes will be paid but typically at lower rates.
It is important to remember that an RESP is an arrangement between the individual, referred to as the “subscriber” and a person or organization who offers the education savings plan product, referred to as the “promoter”, with the purpose of providing for the post-secondary education costs of persons who are related to the subscriber, being typically their children. The arrangement is contractual in nature between the subscriber and the promoter. Notwithstanding that the purpose of the RESP is to provide for the educational costs of persons outside of the contractual relationship, the RESP is an asset of the subscriber. This is the case notwithstanding that the contractual documents and marketing materials, as well as the Canadian Income Tax Act, use words like “beneficiary”, “trust” and “trustee”, to describe the elements of an RESP, thereby incorrectly suggesting a trust exists.
As an asset of the subscriber, an RESP can pose both US income tax [and potentially US estate tax] issues for a US citizen that is resident in Canada. Whether this is the case depends on whether an RESP is considered a trust for US federal income tax purposes. If it is considered a trust, then certain filing obligations arise, with the related compliance costs.
Recently I came across an article that suggested that an RESP is not a trust for US federal income tax purposes and suggested that a simpler form of disclosure may be legitimately relied upon by a US taxpayer that owns an RESP. In this regard, I refer you to the article written by Max Reed and Stephen Albers, The US Tax Classification of the Canadian RESP, (May 5, 2016) Tax Topics No. 2304.
The article is an excellent outline of the arguments to support a conclusion that an RESP is not a trust for US federal income tax purposes. It also provides readers with a practical recommendation with respect to a form of disclosure compliance that ought to be sufficient at avoiding any penalties. Unfortunately, despite the thoroughness of the merits of the various arguments put forward, there remains some residual uncertainty in my mind, such that it may still be the path of least resistance for a US citizen that is resident in Canada to avoid owning a Canadian RESP. Ultimately the message of this blog is that readers who are US citizens should obtain qualified advice about the disclosure obligations The US Tax Classification of the Canadian RESP, (May 5, 2016) Tax Topics No. 2304 they have in respect of all of their US taxation matters, as a cost-benefit analysis should be engaged in to make sure that the Canadian taxation benefits outweigh any added US compliance costs.