Definitions for Registered Education Savings Plans

Advantage – any benefit, or debt that is conditional on the existence of the RESP, subject to certain exceptions for normal investment activities and conventional incentive program.

An advantage also includes any benefit that is an increase in the total fair market value (FMV) of the property of the RESP that is reasonably attributable to any one of the following:

• a transaction or event (or series) that would not have occurred in a normal commercial or investment context between arm’s length parties acting prudently, knowledgeably, and willingly, and one of the main purposes of which is to benefit from the tax-exempt status of the RESP
• a payment received in substitution for a payment for services rendered by the subscriber (or non-arm’s length person) or for a return on investment on non-registered property
• a swap transaction
• specified non-qualified investment income that has not been paid from the RESP within 90 days of the subscriber receiving a notice from CRA requiring removal

An advantage also includes a registered plan strip or any benefit that is income or a capital gain that is reasonably attributable to one of the following:

• a prohibited investment
• an artificial diversion of an amount away from the RESP

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

Adjusted family net income – this is your family net income minus any Canada child benefit and registered education savings plan (RESP) income received plus any Canada child benefit and RESP amounts repaid.

Arm’s length – refers to a relationship or a transaction between unrelated persons who act in their separate interests. An arm’s length transaction is generally a transaction that reflects ordinary commercial dealings between parties acting in their separate interests.

Common-law partner – a person who is not your spouse, with whom you are living in a conjugal relationship, and to whom at least one of the following situations applies. The person:

• has been living with you in a conjugal relationship, and this current relationship has lasted at least 12 continuous months
  Note
  In this definition, “12 continuous months” includes any period that you were separated for less than 90 days because of a breakdown in the relationship.
• is the parent of your child by birth or adoption
• has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support

Fair market value (FMV) – is generally considered to mean the highest price expressed in terms of money that can be obtained in an open and unrestricted market between informed and prudent parties, who are dealing at arm’s length and under no compulsion to buy or sell. For more information on the valuation of securities of closely held corporations, see Information Circular IC89-3, Policy Statement on Business Equity Valuations.

Non-arm’s length – generally refers to a relationship or transaction between persons who are related to each other. However, a non-arm’s length relationship might also exist between unrelated individuals, partnerships or corporations, depending on the circumstances.

For more information, see the definition of “Arm’s length”.

Non-qualified investment – is any property that is not a qualified investment for the RESP trust. For more information on non-qualified investments see Income Tax Folio S3-F10-C1, Qualified Investments - RRSPs, RESPs, RRIFs, RDSPs and TFSAs.

Prohibited investments – this is property to which the RESP subscriber is closely connected. It includes any of the following:

• a debt of the subscriber
• debt or share of, or an interest in, a corporation, trust, or partnership in which the subscriber has a significant interest (generally a 10% or greater interest, taking into account non-arm's length holdings)
• a debt or share of, or an interest in, a corporation, trust, or partnership with which the subscriber, does not deal at arm's length

A prohibited investment does not include a mortgage loan that is insured by the Canada Mortgage and Housing Corporation or by an approved private insurer. It also does not include certain investment funds and certain widely held investments which reflect a low risk of self-dealing. For more information on prohibited investments see Income Tax Folio S3-F10-C2, Prohibited Investments - RRSPs, RESPs,  RRIFs, RDSPs and TFSAs.

Registered education savings plan (RESP) – a registered contract between an individual (the subscriber) and a person or organization (the promoter). The subscriber generally makes contributions to the RESP, which earns income, paid in the form of educational assistance payments to one or more identified beneficiaries.

Registered plan strip – the amount of a reduction in the FMV of property of the RESP, if the value is reduced as part of a transaction or event (or series) for which one of the main purposes is to enable the subscriber (or non-arm’s length person) to obtain a benefit as a result of the reduction. Exceptions are provided for plan distributions that are included in income, or specifically excluded from income (such as a tax-deferred transfer between plans).

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

Related persons – are not considered to deal with each other at arm's length. Related persons include individuals connected by blood relationship, marriage, common-law partnership, or adoption (legal or in fact). A corporation and another person or two corporations may also be related persons.

Specified non-qualified investment income – any income (excluding the dividend gross-up), or a capital gain that is reasonably attributable, directly or indirectly, to an amount that is taxable for any RESP of the subscriber (for example, subsequent generation income earned on non-qualified investment income).

Spouse – a person to whom you are legally married.

Swap transaction – any transfer of property between the RESP and the subscriber (or a person not at arm’s length with the subscriber). Exceptions are provided for contributions to and distributions from the RESP, purchase and sale transactions between the RESP and another RESP of the subscriber, and transactions relating to insured mortgages.

For more information on swap transactions and applicable transitional rules, see Income Tax Folio S3-F10-C3, Advantages – RRSPs, RESPs, RRIFs, RDSPs, and TFSAs.

Unrelated persons – may not be dealing with each other at arm's length at a particular time. Each case will depend upon its own facts.  The following criteria will depend upon its own facts.  The following criteria will be used to determine if the parties to a transaction are not dealing at arm's length:

• whether there is a common mind that directs the bargaining for the parties to a transaction
• whether the parties to a transaction act in concert without separate interests; ("acting in concert" means, for example, that parties act with considerable interdependence on a transaction of common interest)
• whether there is de facto control of one party by the other because of, for example, advantage, authority, or influence

For more information, see Income Tax Folio F1-F5-C1, Related Persons and Dealing at Arm's Length.