I was recently asked how RESPs effect the calculation of a spouse’s net family property (“NFP”) for purposes of Ontario’s Family Law Act. Because a RESP is considered the property of the subscriber, and not a trust, it generally forms part of the subscriber’s estate on his or her death. As a result, this question is relevant not only on marriage breakdown but also when a spouse elects to receive an equalization payment rather than the gifts left to him or her under the other spouse’s Will.
Generally, the provisions of the Family Law Act require that a RESP be considered in calculating the subscriber spouse’s NFP. As mentioned, this is because RESPs are considered the property of the subscriber. Of course, there are exceptions to this rule. For example, if some or all of the funds in the RESP were contributed by way of gift or if there is a domestic contract in place, some or all of the RESP may be excluded from the calculation of NFP.
Calculating the value of the RESP to the subscriber for purposes of the NFP calculation is where things get tricky. To understand why, it’s helpful to consider how withdrawals from a RESP are taxed.
With a RESP, the subscriber pays amounts into the RESP, called “contributions”. These contributions are allowed to grow tax-free within the RESP. In addition, the Government of Canada (and some provincial governments) offer savings incentives whereby the government will contribute directly to the RESP. The earnings on contributions and payments from provincial or federal education savings programs are referred to as “Educational Assistance Payments” (“EAPs”) when they are paid to a beneficiary of the RESP to assist with financing post-secondary education.
When everything goes as planned, the beneficiary includes the EAPs in his or her income for the year they are received. Because the beneficiary’s tax rate is generally low, this typically results in very good tax savings over having the accumulated income taxed in the hands of the subscriber.
However, when things don’t go as planned and the subscriber seeks to withdraw funds from the RESP, rather than having amounts paid to a beneficiary, things get complicated. Subject to the terms and conditions of the RESP, the subscriber can receive a refund on the contributions he or she has made without tax penalty. However, any earnings on contributions (referred to as “Accumulated Income Payments”) (“AIPs”) may only be withdrawn by the subscriber under strict conditions. As a result, it will not always be possible to withdraw AIPs at the time of divorce proceedings. Unless further specific conditions are met, any AIPs the subscriber withdraws must be included for tax purposes in the subscriber’s income and will be subject to an additional 20% penalty tax. Government contributions to the RESP will be lost.
Because of these potential tax consequences, the value of the RESP for the purposes of calculating the subscriber’s NFP is often lower than the face value of the RESP. The Family Law Act provides that tax liabilities, including contingent tax liabilities, are deducted in calculating the value of NFP.
In practice, spouses are frequently “joint subscribers” to a RESP, which means that they each have an equal ownership interest in the RESP. In this case, although the RESP may be included in calculating each spouse’s NFP, it is unlikely to impact the equalization payment that must be made. In other cases where one spouse is the sole subscriber, it is frequently preferable to deal with the RESP by way of a separate agreement and to exclude it from the NFP calculation. In all other cases though, the complexity in calculating its value makes it well worth the while to seek the advice of a family law lawyer.