RESP advice for Canadian citizens living in the U.S.


Q. I opened a RESP account while I was living in Canada, as a Canadian citizen. A few years back, we moved to the U.S., where my kids are going to college and university. I still have an active RESP account and make regular monthly contributions.

We file our tax returns in the U.S. only, since we declared ourselves as non-resident Canadian citizens in 2014.

Please let me know if we are still entitled to receive the Canadian government’s grant on RESP contributions, and what is the procedure to withdraw the funds.
–Sohail

A. When you become a non-resident of Canada, you can generally continue to maintain Canadian registered investment accounts like a Registered Education Savings Plan (RESP). You may not be able to buy new mutual funds as a non-resident, but can continue to hold existing mutual funds, sell those mutual funds, or buy other investments, like stocks, bonds and exchange-traded funds (ETFs). 

There are a couple issues to be aware of in your case, Sohail. A U.S. taxpayer, whether a U.S. citizen in Canada, or a U.S. resident like you, may have U.S. tax implications from a Canadian RESP. The Internal Revenue Service (IRS) does not recognize the tax-deferred status of a RESP, so the income will be taxable on your U.S. tax return. The IRS also considers RESPs to be foreign grantor trusts, generally requiring the filing of form 3520-A (an annual information return) and 3520 (a return to report contributions or withdrawals, if applicable). 

If you own Canadian mutual funds or ETFs in your RESP, these may be considered Passive Foreign Investment Corporations (PFICs). PFICs have additional tax reporting requirements for a U.S. taxpayer as well. 

U.S. citizens residing in Canada will have to report any Canada Education Savings Grants (CESGs) or similar government grants as income on their U.S. tax return. However, non-residents like you, Sohail, are not eligible to receive grants for their ongoing contributions. The residency requirement is based on the residency of the beneficiaries of the RESP, not the subscriber, and since your children live with you in the U.S., the RESP should not be eligible for government grants. 

In my experience, it is not uncommon for non-residents to fail to update their residency status with their Canadian financial institution. This could lead to CESG grants continuing to be paid on contributions, or improper tax withholding for other non-RESP accounts. 

Given that your RESP is not benefitting from Canadian government grants, is taxable in the U.S., and has restrictions on the investments you can purchase, you probably should not be contributing to it, Sohail. There are U.S. education saving options like 529 Plans or Coverdell Education Savings Accounts (ESAs), for example, that may be more appropriate for a U.S. resident.

That said, you can still use your RESP account to fund your children’s post-secondary education costs in the U.S. When any RESP withdrawal is made, the withdrawal can be made up of principal (original contributions), government grants (CESGs, Canada Learning Bonds, etc.), or accumulated income (investment income earned on contributions and grants). Principal withdrawals are always tax-free. However, if a beneficiary is a non-resident at the time of a withdrawal, the government grants previously received will have to be repaid by the financial institution holding the account. 

An RESP withdrawal of accumulated income for a non-resident will be subject to withholding tax. Withholding tax for a non-resident is generally 25% of the accumulated income on the withdrawal. 

Maintaining a Canadian RESP account for a non-resident of Canada may have some benefits, but also drawbacks. Contributions should not be made to a RESP for a non-resident. In your case, Sohail, you cannot change the past contributions, but I would make sure your residency status is properly documented with the financial institution where the RESP is located and seek tax advice from a U.S. accountant to ensure you are properly reporting the RESP account and past contributions. You may need to amend previous tax filings with the IRS if you were not compliant previously. As a result of grants to be repaid and withholding tax, some, but not all of the money in your RESP account can be used to fund your children’s U.S. post-secondary costs. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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