Blog: RESPs and the Death of the Subscriber – Part INovember 2nd, 2016
Although the Registered Education Savings Plan (“RESP”) was first introduced by the Government of Canada in 1972, the current incarnation we are most familiar with stems from proposals introduced in the 1998 Federal Budget. Surprisingly, given the fact that it has been around for almost 20 years, it is still often an estate asset that causes confusion for trustees and executors.
Contrary to some people’s understanding, an RESP is not a trust. A subscriber enters into an RESP contract with a promoter and names one or more beneficiaries under the plan. The subscriber makes contributions to the Registered Education Savings Plan and, if applicable, the federal and/or provincial government(s) may supplement the RESP by contributing grants (“government grants”). The monies are typically invested and grow tax-free within the RESP. When a beneficiary is eligible, the promoter can make a payment out of the RESP to assist with a beneficiary’s post-secondary education (“educational assistance payments”). The education assistance payments consist of government grants and the earnings on the monies invested within the RESP. These amounts are taxed in the hands of the beneficiary recipient. In addition, under certain circumstances, the promoter can pay the earnings on the monies invested in the RESP to the original subscriber (“accumulated income payments”). Accumulated income payments are subject to regular income tax as well as an additional special tax of 20%. The promoter can pay the original contributions to the subscriber or to a beneficiary tax-free.
If a subscriber dies before the RESP has been terminated or before all amounts have been paid out as educational assistance payments to one or more beneficiaries, unless there is a joint subscriber, all or a portion of the RESP may be subject to Estate Administration Tax. A joint subscriber can only be a surviving spouse or common law partner.
In addition, if the deceased’s will does not name a successor subscriber of the RESP and:
- it has been more than nine years since the RESP was established and each beneficiary is 21 years of age or older and not eligible to receive an educational assistance payment; or
- the year of death coincides with the year that includes the 35th anniversary of the RESP (40th anniversary if it is a single beneficiary plan for a beneficiary who is entitled to the disability tax credit);
- or all the beneficiaries are deceased,
the amounts representing potential accumulated income payments would also be included in the estate’s value for purposes of calculating the Estate Administration Tax.
If the will does name a successor subscriber of the RESP, the subscriber (and the deceased’s estate) would not otherwise be entitled to the government grants and the earnings accumulated in the plan. Therefore these amounts would not be included in the estate’s value and would not be subject to Estate Administration Tax.
The Frequently Asked Questions section of the Ontario Ministry of Finance’s Estate Administration Tax webpage only muddies the waters. In response to the question, “What happens to a Registered Education Savings Plan (RESP) if the subscriber of the plan dies?” the final paragraph of their response reads:
RESPs differ from RRSPs, Registered Retirement Income Funds, and insurance policies because RESPs are not covered by Ontario’s beneficiary designation provisions in the Succession Law Reform Act, absent a joint RESP subscriber, the value of the RESP is included in the deceased owner’s estate and is subject to estate administration tax (emphasis added).
Absent reviewing subsection 1(1) of the Estate Administration Tax Act (Ontario), which defines the “value of the estate” as all the property that belonged to the deceased person at the time of his or her death, one may be lead to believe that the entire value, including the contributions, government grants and the fair market value of the accumulated earnings in the plan would be subject to Estate Administration Tax. Upon closer examination, only in rare circumstances would this be true.
In Part II of this article, which will be published in the next submission of Deadbeat, I will further discuss what happens to a Registered Education Savings Plan when a successor dies and there is a lack of proper planning.
Read the original publication on the Ontario Bar Association site here.
Connect with the Author
Aaron Schechter, CPA, CA is a partner with Crowe Soberman’s Tax Group. Aaron’s expertise lies in strategic tax planning for owner-managed private companies. His client portfolio includes a range of industries, including manufacturing, construction, entertainment, software development, retail, and service-oriented businesses. Contact Aaron by email at firstname.lastname@example.org or directly at 416.963.7192.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.