Tax payable on non-qualified investments

Effective March 22, 2017, if the RESP trust acquires property that is a non-qualified investment or if previously acquired property becomes non-qualified, a tax is imposed on the subscriber of the RESP.

The tax is equal to 50% of the FMV of the property at the time it was acquired or it became non-qualified.

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The subscriber is also liable for the 100% advantage tax on non - qualified investment income if this income is not withdrawn promptly.

If the RESP acquired a non-qualified investment after March 22, 2017, or a previously acquired property becomes a non-qualified investment, the subscriber must file Form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs.

Note

If an investment is both a non-qualified investment and a prohibited investment, it is treated as a prohibited investment only and the trust is not subject to tax on the investment earnings.

Obligations of the RESP promoter

The budget proposes that after March 22, 2017, 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 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 began to hold a non-qualified investment.

Changes to the tax treatment of RESPs

For investments acquired after March 22, 2017 (or investments acquired before March 23, 2017, that cease to be qualified investments after March 22, 2017), the budget proposes to repeal the 1% per month penalty tax imposed on an RESP trust that holds a non-qualified investment, and instead to subject the RESP trust 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.

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