Or: What happens when Canadian education planning meets US tax reality.
Hello! Cameron here. Tax Season has ended, so I figured it was time I shook the post tax-season holiday rust off, and published something.
So. RESP Headaches.
You opened an RESP to help fund your kid’s education. Maybe you’re the parent. Maybe the grandparent. It makes sense. The contributions grow tax-deferred in Canada, the Canadian government chips in a grant, and any account withdrawals get taxed in the student’s hands (usually at low rates). All good.
Then fast forward. Life happens. People move. Maybe the kid’s now going to school in the US. Maybe you took a job across the border.
Now that clean RESP story gets messier.
Below are the most common scenarios that I see come across my desk, and some guidance on how to deal with them.
Scenario 1: Everyone stays Canadian. Student goes to school in Canada.
This is what the RESP was built for. Contributions come out tax-free. Grants and earnings (the “EAP” acronym you see referred to in the shiny Canadian Big 5 bank literature out this) are taxed in the hands of the student/kid, who likely owes nothing if they don’t have much other income.
If there are siblings, if you’ve got RRSP room, or if the student has part-time work, there are some other tax strategy levers to pull. But otherwise there isn't anything else needed here as far as tax reporting.
Scenario 2: Subscriber moves to the US. Student stays in Canada.
Say a parent moves to the US. Now it gets trickier.
The US treats the RESP like a regular investment account, so the subscriber (read: parent) needs to report interest, dividends, and capital gains annually on their US tax return. No deferral. Just more admin headache and extra complexity.
The RESP account also has to be reported as a foreign financial asset. Depending on the value, you might need to file FBAR, possibly Form 8938. (Not 3520 anymore—thanks to Rev. Proc. 2020-17.)
Some families move the RESP into the name of a trusted Canadian-resident relative to avoid the US tax headaches. That works, but it has its own risks and needs to be done properly. (Understatement of the century. Be smart if you're going to pursue this.)
Scenario 3: Everyone’s living in the US, + Student goes to school in the US
This is where the RESP loses a lot of its value. Withdrawals of contributions are fine, as the US considers it your own after-tax money. But EAPs get hit with a 25% Canadian withholding tax, and the Canadian grants have to be paid back. The subscriber still reports all income on their US return.
Student-side: the student doesn’t pick any of the RESP amounts as income in the US (The account is taxable to the subscriber/parent).
Like the saying goes: If you find yourself in a hole, stop digging. This scenario is one of those that might warrant some re-thinking.
In Summary
RESPs can still work in cross-border setups, but the tax drag and reporting can turn a helpful education tool into an admin and compliance liability. Every situation is different, but if there’s a US move in the picture, the RESP should get reviewed (Ideally before there's a large pool of money sitting there, and things start to get complicated.)
Usual Disclaimer: What is written here is not formal tax advice. I’m not your CPA. It’s possible, or dare I say even probable, that the comments and opinions expressed here contain material errors, are out of date, or that important stuff has been left out. Don’t use this info to make tax decisions. Hire a pro to help you.