“How do I move my financial life to another country?” It’s a question we hear from many clients as they begin making a cross-border transition. When you are making the move to the U.S., you want to transition your finances smoothly and seamlessly while saving time, headaches, and every dollar you possibly can.
Much like financial planning, transition planning is a process and not a transaction or an end in itself. And like financial planning, the most effective transition planning hinges on a clear understanding of what you want to achieve in terms of lifestyle both now and in the future.
One of our key roles as cross-border financial planners is to learn where you are trying to go (your goals and objectives) and then design a detailed plan to test the viability of your goals/objectives and ultimately get you to your destination. After all, without a flight plan, how can you know which direction to go?
One important area that should be considered when making a move across the border is education planning. As a family you may have started a savings plan for you or your children’s education. Registered Education Savings Plans (RESPs) are a popular savings vehicle in Canada for this goal due to available government grants, bonds and tax savings. How are these accounts treated when one or both of the parties involved becomes a U.S. resident for tax purposes?
Subscriber (Owner) – The tax-sheltered status of an RESP only applies to Canadian tax residents. With a move to the United States, income and capital gains within the account will now be reportable and taxable on the subscriber’s U.S. return.
IRS Tax Reporting – RESP accounts require annual disclosure on the subscriber’s U.S. tax return by one of two methods. The first is a school of thought that these are foreign trusts that require reporting on IRS forms 3520 and 3520-A, with income reported annually. The second method is to report the income annually on an IRS Schedule D and include a statement in the return indicating that the account is treated as a taxable brokerage account instead of a foreign trust. Additional reporting may be required for the investments within the account. If you have already moved to the U.S. and filed a tax return, check with your accounting professional before deciding which of these options to use or before making any changes to your reporting.
It is possible to change the subscriber on an account to someone who is not impacted by these reporting requirements, but other factors relating to the Beneficiary and your contributions also need to be considered.
When a Beneficiary becomes a non-resident of Canada, contributions to the RESP are no longer allowed and the beneficiary is no longer eligible for government incentives. If Canadian residency is re-established in the future, contributions can resume, and grants will again be paid, but the period the beneficiary was a non-resident does not qualify for accumulated grants.
Educational Assistance Payments (EAPs) are based on enrollment in qualified post-secondary studies or a specified educational program and
are comprised of earnings and any government incentives (grants, bonds). A beneficiary must be a resident of Canada in order to receive the government incentive portion as part of the EAP, however, a non-resident can receive income earned within the account. An EAP may also be paid up to six-months after ceasing enrollment. Thus beneficiaries qualify, in part, whether they remain a resident of Canada or become a tax resident of the United States. When an EAP is made, The RESP promoter will issue a tax slip to the beneficiary, and the beneficiary will claim this on their personal tax return for the year of receipt.
If the beneficiary has completed their education, it may be possible to replace the beneficiary with one who can use the EAP government payments or investment earnings; however, if this is not an option the subscriber may need to close the account.
When an RESP is closed, the subscriber’s contributions can be withdrawn tax-free. All grants and bonds remaining within the account must be returned to the government. However, earnings can only be withdrawn (known as an Accumulated Income Payment, or AIP) if the account has been open for 10 years, the beneficiaries are at least 21 and not attending post-secondary education, AND, here’s the glitch, the subscriber is a resident of Canada.
If the RESP must be closed and the conditions for an AIP are not met, the remaining earnings in the account will be paid to a designated educational institution in Canada of your choosing.
If you are contemplating a move to the U.S. and have an RESP that has been open for greater than 10 years and beneficiaries that are over age 21, there are other options that may be available while you are still a tax resident of Canada.
The decision whether to keep your RESP open or close the account is as unique as your personal circumstances. The knowledge and expertise of a cross-border planning professional can help you to determine what solution will work best for both the subscriber and beneficiary of the plan. Please reach out to Cardinal Point to discuss how we can help you to make the choice that makes the most sense for you.