U.S. Expatriates with RESPs

U.S. citizens (or even green cardholders) resident in Canada who are contributors (or a joint contributor) to their children’s RESP (“registered educational savings plan”) may have U.S. reporting issues.

Should the RESP be regarded as a foreign trust by the IRS (as they do with RRSPs), then the RESP would be regarded as foreign grantor trust. In this regard the annual income realized in the RESP including the grants received from the federal government (called CESG) is reportable on your U.S. 1040. In addition to this, IRS Form 3520 -A and/or 3520 information returns would have to be filed.

There may be an argument under the regulations that the RESP is not a trust for U.S. tax purposes., however such defense would have to be made with the return or upon audit or examination by the IRS. If the RESP was not a “trust” under U.S. law, the income reporting above would still be required.

To make things more complicated, if mutual funds are invested in the RESP, then the mutual fund could be a PFIC “(passive foreign investment company”) subject to additional reporting requirements.

With the RESP, if a Canadian non- U.S. person (such as a non-U.S. parent or Canadian grandparent) was the contributor to the RESP, then there is no issue if the child is not a U.S. person. However, if the child is a U.S. person at the time of distributions from the RESP, then the RESP would be a non-grantor foreign trust (assuming it is a trust for U.S. tax purposes) and the punitive throw-back anti-deferral rules would apply causing punitive tax and interest. This would occur when the child commences post-secondary school and withdraws funds for tuition, etc.

I presume, taxpayers should not be so quick in getting U.S. citizenship for their children born in Canada, at least not until they graduate. Attaining U.S. citizenship puts the child under the U.S. tax reporting umbrella from the get-go. The solution may not to collapse the RESP for existing plans that are regarded as foreign grantor or non-grantor trusts as Canada has repayment provisions for the CESGs. This should be verified with the trustee of the RESP or your financial advisor to determine the Canadian impact.