Anti-avoidance rules for RESPs

The anti-avoidance rules provide a special tax on certain advantages that unduly exploit the tax attributes of an RESP, as well as special taxes on prohibited investments and on non-qualified investments.

Each person who is a subscriber of an RESP is jointly liable for the taxes on prohibited investments, non-qualified investments and advantages described below. Where two or more subscribers of an RESP are jointly liable to pay such a tax, only one form needs to be filed on behalf of all the subscribers that are liable for the tax.

Tax payable on prohibited investments

If the RESP trust acquires a prohibited investment or if previously acquired property becomes prohibited, the investment will be subject to a special tax equal to 50% of the fair market value (FMV) of the investment, and the subscriber must file form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs.

The tax is refundable in certain circumstances. For more information, see Refund of taxes paid on non-qualified or prohibited investments.

If the prohibited investment ceases to be a prohibited investment while it is held by the RESP trust, the RESP trust is considered to have disposed of and immediately re-acquired the property at its FMV.

The subscriber is also liable for the 100% advantage tax on income earned and capital gains realized on prohibited investments.

The 100% advantage tax applies to income earned, and the portion of any realized capital gain that accrued, after March 22, 2017, regardless of when the prohibited investment generating the income or gain was acquired.

For more information, see Income Tax Folio S3‑F10‑C2, Prohibited Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs.

Note

If an investment is both a non-qualified investment and a prohibited investment, it is treated as a prohibited investment only.

Tax payable on non-qualified investments

If the RESP trust acquires property that is a non-qualified investment or if previously acquired property becomes non-qualified, the investment will be subject to a special tax equal to 50% of the FMV of the investment, and the subscriber must file form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs.

The tax is refundable in certain circumstances. For more information, see Refund of taxes paid on non-qualified or prohibited investments.

The subscriber is also liable for the 100% advantage tax on non‑qualified investment income if this income is not withdrawn promptly.

For more information, see Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs.

Note

Income earned and capital gains realized by a RESP trust on non-qualified investments will continue to be taxable to the trust, regardless of when the investment was acquired. If an investment is both a non-qualified investment and a prohibited investment, it is treated as a prohibited investment only and the RESP trust is not subject to tax on the investment earnings.

Obligations of the RESP promoter

The promoter of an RESP must exercise the care, diligence and skill of a reasonably prudent person to minimize the possibility that a trust governed by the plan holds a non-qualified investment.

If the promoter fails to comply with this obligation, the promoter is liable to a penalty under the Income Tax Act (ITA).

The promoter will also be required to notify the subscriber of the RESP, in prescribed form and manner before March of a calendar year, if at any time in the preceding year the RESP trust acquired or disposed of a non-qualified investment, if a qualified investment became a non‑qualified investment, or if a non-qualified investment became a qualified investment.

Tax treatment of RESPs

For non-qualified investments acquired after March 22, 2017 (or investments acquired before March 23, 2017, that cease to be qualified investments after March 22, 2017), the RESP trust will be subject to Part I tax on its income (including capital gains) from the investment.

In addition, an RESP’s registration would no longer become revocable as a result of the RESP trust’s acquisition after March 22, 2017, of a non-qualified investment.

Reporting requirements by the RESP trust

Financial institutions are required to report information to CRA and the subscriber when an RESP trust begins or ceases to hold a non-qualified investment in a year.

Financial institutions must, by no later than the end of February in the year following the year in which the non-qualified property was acquired or previously acquired property became non-qualified, provide relevant information to us and the subscriber.

This information includes:

This information is necessary to enable the subscriber to determine the amount of any tax payable or of any possible refund of tax previously paid.

If you determine that a particular non-qualified investment held by your RESP trust is also a prohibited investment for the RESP trust, contact your promoter.

For more information, see Folio S3–F10–C2, Prohibited Investments – RRSPs, RRIFs and TFSAs.

Tax payable on an advantage

If the subscriber or a person not dealing at arm’s length with the subscriber (including the RESP itself) was provided with an advantage in relation to their RESP during the year, a 100% tax is payable which is:

For taxes payable on an advantage, you must file using form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs.

For more information, see Income Tax Folio S3-F10-C3, Advantages – RRSPs, RESPs, RRIFs, RDSPs, and TFSAs.

Note

When an advantage is extended by the promoter of an RESP, the promoter, and not the subscriber, is liable for the tax. The promoter must file Form RC298, Advantage Tax Return for RRSP, TFSA, or RDSP Issuers, RESP promoters or RRIF Carriers.

Exceptions

The advantage rules will not apply to benefits related to a swap transaction if the transaction is:

Refund of taxes paid on non-qualified or prohibited investments

You may be entitled to a refund of the 50% tax on non‑qualified or prohibited investments if the investment was disposed of, or ceases to be a non-qualified or prohibited investment, before the end of the calendar year after the year in which the tax arose (or such later time as is permitted by the Minister of National Revenue).

However, no refund will be issued if it is reasonable to expect that the subscriber knew, or should have known, that the investment was or would become a non-qualified or a prohibited investment.

The refund applies to the 50% tax on non-qualified or prohibited investments but not to the 100% tax on advantages.

Note

If the 50% tax on non-qualified or prohibited investments, and the entitlement to the refund of that tax, arose in the same calendar year then a remittance of the tax is not required. For example, no remittance of tax would be required if an RESP trust acquired and disposed of a non-qualified investment in the same calendar year.

How to claim a refund

To claim a refund, you must:

The documents must contain the following:

How to request a waiver or a cancellation of taxes

We may waive or cancel all or part of the taxes if we determine it is fair to do so after reviewing all factors, including whether:

The waiver is limited to tax paid under the anti-avoidance rules and not taxes paid under any other part of the ITA.

To consider your request, we need a letter that explains why the tax liability arose, why this is a reasonable error, and why it would be fair to cancel or waive all or part of the tax. Send your letter to one of the following addresses:

If your residential address is based in Ontario, Prince Edward Island, Newfoundland and Labrador, Yukon, Nunavut, Northwest Territories as well as the following cities in the province of Quebec (Montréal, Québec City, Laval, Sherbrooke, Gatineau and Longueuil); send your request to:

Canada Revenue Agency
Sudbury Tax Centre
Pension Workflow Team
Post Office Box 20000, Station A
Sudbury ON P3A 5C1

If your residential address is based in Manitoba, Saskatchewan, Alberta, British Columbia, Nova Scotia, New Brunswick and the remaining areas in the province of Quebec not listed under the Sudbury Tax Centre; send your request to:

Canada Revenue Agency
Winnipeg Tax Centre
Pension Workflow Team
Post Office Box 14000, Station Main
Winnipeg MB  R3C 3M2

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