Questions and Answers, Registered Education Savings Plan (RESP) - Consultation Session October 29, 2002
Note: Additional CCRA questions and answers relating to RESPs can be found here.
The Directorate received numerous questions from the industry. After eliminating duplicates and others that were too specific for this session, we responded to the 21 questions below. Lyne Aubin-Morisset, Lorraine Veilleux, and Lois Washkurak read the attached questions and answers. HRDC answered any questions that were submitted relating to the CESG program.
1. When issues arise on RESPs, it is not always clear if we should contact HRDC or the CCRA. It is also difficult to locate information within the CCRA. Would it be possible to have both HRDC and CCRA issues on the same website?
We are committed to being as accessible as possible and we will be working toward adding new links to our website.
2. Last year the Ontario government was proposing an RESP contribution credit. Has the CCRA given any thought to allowing such a benefit?
At present, there are no plans for introducing an RESP contribution credit to the Income Tax Act. Any such change should be proposed to the Department of Finance for its review and consideration.
3. When there is a change of beneficiary or a plan transfer, the life of the plan cannot be extended beyond 25 years. This makes beneficiary changes and transfers very problematic. For example, if a plan was started for a child at birth, and when the child is five years old he is replaced by another beneficiary (a baby age 0 years), the latter must claim his three scholarships before age 20, which is impossible in actual fact. However, this is required by the 25-year life of the plan rule. The same problem arises for partial transfers. In other words, if the children are more than 2 or 3 years apart in age, it is deceptive to think that the new beneficiary will be able to claim his scholarships, and this greatly penalizes group plans. Could one of the following solutions be considered?
- Extend the life of a plan to 30 years, or
- Allow the plan to start again at age 0 for the first change in beneficiary only, or
- Base the duration of the plan on the child's age (26 years).
There are no plans at the moment for changing the 25-year rule in the ITA. Any such change should be proposed to the Department of Finance for its review and consideration.
4. To improve the educational assistance payment (EAP) withdrawal process, would it be possible for the CCRA to make the designated institutions that fall under section 118.6 of the Act more accessible by listing all the institutions on the CCRA/HRDC website? Doing so would make the process efficient and less cumbersome.
The CCRA and HRDC will coordinate and discuss the possibility of adding a link to the Canada Student Loans website on our website. In the meantime, you can call your tax services offices at 1-800-959-5525 (English) or 1-800-959-7775 (French).
5. If I provided my proof of enrolment, then decided not to go to school and used the education funds for vacation expenses, how would the CCRA know? And if they did find out, would a penalty be assessed, and if so, how would I be penalized?
The CCRA reserves the right to conduct audits with respect to all RESP contracts. The purpose of an EAP is to help the beneficiary to further his or her post-secondary education. If an EAP does not satisfy this requirement, the payment will not be considered an EAP but, rather, an accumulated income payment (AIP) and would be taxed accordingly.
This means that the payment would be subject to the beneficiary's basic tax rate plus the additional 20% AIP tax. (Please note that this additional tax is 12% for Quebec residents for tax purposes). Promoters may wish to remind subscribers and/or beneficiaries of the consequences of an EAP being paid that is not to help the beneficiary with post-secondary education.
6. Is it possible to receive a retroactive payment for education? Suppose a student is waiting to enter university to withdraw an amount from his contract. He or she then decides not to go on to university. Can the student receive retroactive payments for his years at CEGEP?
No. In order to receive an EAP, a beneficiary must be, at the time of payment, enrolled as a full-time student in a qualifying educational program at a post-secondary educational institution.
7. The amount payable to an individual before the individual has completed 13 consecutive weeks in a qualifying educational program is limited to $5,000 per beneficiary. Is the $5,000 net of fees? In order for the beneficiary to receive the $5,000, should the $5,000 be grossed up to include the fee?
An EAP is to be used for educational purposes only and is a taxable amount when received by the beneficiary. A fee for processing the withdrawal should be handled separately as a fee charged against the trust, in accordance with subsection 146.1(2)(a) of the Income Tax Act. Therefore, the beneficiary should make arrangements to pay the fee separately and not use funds within the plan to do so.
8. How do we treat a beneficiary who studies abroad? How can the RESP be used (can the beneficiary withdraw EAPs)? If the Canadian resident becomes a resident of another country, can he or she still withdraw EAPs and the CESG?
There is no residency requirement for receiving an EAP from an RESP. However, the grant may or may not be payable depending on the residence status of the beneficiary. In the case of a beneficiary who changes residence and/or citizenship, check with the International Tax Service Office to determine the tax status of the beneficiary. Interpretation Bulletin IT-221, Determination of an Individual's Residence Status, may also be helpful in determining residency status for tax purposes.
9. The transfer process includes Specimen Plan numbers. Would it be possible for the CCRA to compile a list of all the specimen plan numbers used by the promoters and forward the list to them? This will eliminate calls that are made to the relinquishing/receiving institutions that fail to provide us with this information at the time of the transfer. We have compiled a small list, but it is not complete.
We cannot provide a list of specimen numbers to anyone. We would like to caution anyone compiling a list that promoters may have more than one specimen plan of the same type (family, non-family). It should also be noted that specimen plan numbers change regularly due to mergers, amalgamations, sales, etc.
10. Under what conditions can a subscriber name change be processed to a plan as opposed to transferring to a new plan with the same beneficiary and within the same institution? For example, say a grandmother who had a plan and 5 grandchildren from different families passes away. Can the executor still manage the plan, even though the relationship to the plan is now different?
The only way to make a change to a subscriber is as outlined in subsection 146.1(1) of the Act: enter into a plan, marriage breakdown, death. Paragraph (c) states that the estate of the subscriber can become the subscriber as long as the estate makes a contribution to the plan. The executor can manage the plan without becoming the subscriber. Subparagraph 146.1(2)(j)(I) of the Act states that, for a family plan, each beneficiary must be connected to each living subscriber or have been connected to a deceased original subscriber under the plan by blood relationship or adoption.
11. The contributions can be seized, the grant is returned to HRDC, but what would happen to the income earned in the plan? Can the income be seized also or does it remain in the plan for 10 years? If so, after the 10 years whom does the income belong to?
The ITA is silent on the subject of who owns the funds in an RESP. It will be up to the courts to make the determination.
12. We need an explanation of the rules concerning non-resident subscribers with resident beneficiaries. Do these require a special type of filing?
With requests for registration of contracts where at least one individual is a non-resident and does not have access to a SIN, the old procedure of the T550 accompanied by a paper listing must be followed. These requests must be submitted to the CCRA. RESPs for non-resident beneficiaries are not eligible for grants.
13. How do we retroactively file for a grant on accounts opened in 1999 without a beneficiary SIN and then closed? The CCRA instructed us that these plans could be re-opened under new plan accounts and these plans would then be registered and able to receive a grant. How do we file these plans with the CCRA?
An educational savings plan contract, which was terminated because at the end of 2001 the promoter did not obtain the beneficiary SIN, cannot be registered retroactively. If a new contract is entered into in a subsequent year, the registration of the contract and the payment of the CESG are processed as a new contract. The grant is only paid to registered ESP contracts. The amount of the grant is based on a beneficiary's unused CESG room and the amount of the contribution made into the RESP. Grant room accumulates whether or not a child is an RESP beneficiary.
14. Would you consider providing administrative relief under certain circumstances? Without administrative relief, a client can ultimately suffer penalties through errors made by financial institutions. For example, if an account originally registered as an RESP is changed to a non-registered account in error and then transferred to another institution as an RESP, both the subscriber and the beneficiary may suffer financial losses. (Loss of contribution room, possibility of revocation, grant claw-back, loss due to price changes on fund invested, grant loss cannot be recaptured and financial restitution by institution not tax-sheltered, T3 slips issued for period not registered).
There are no administrative relief provisions for RESPs. For the situation mentioned above, this would not be considered administrative relief. The funds of an RESP are held in a trust and not an account. There are only 6 types of payments that can be made from an RESP trust. A transfer of funds to any vehicle other than another trust that holds property pursuant to another RESP is not a permitted payment from an RESP trust. Therefore, this situation is not an administrative error but an issue of non-compliance with the Income Tax Act. The promoter is ultimately responsible for the administration of the plan. It is up to each individual promoter to ensure that all relevant information is obtained when a transfer or transaction occurs.
15. Under what circumstances will the CCRA give an exception to the 13-month beneficiary SIN requirement?
There are no exceptions to the 13-month rule.
16. When an ESP contract is set up, the promoter has 13 months to obtain the SIN for an individual beneficiary. If a promoter received instructions from an RESP subscriber to add another beneficiary who does not have a valid SIN, do the provisions set out in 146.1(12.1) apply immediately, or will the promoter be given a grace period to meet the conditions set out in 146.1(2)? Would the promoter be penalized for setting up a new plan for the intended new beneficiary in order to have the 13-month period to receive the SIN number, then transferring the beneficiary to the original plan once the SIN has been acquired? Transferring beneficiaries between plans causes extra work for the promoter in order to have the grace period required for the subscriber to acquire a SIN for the added beneficiary. Would the CCRA be willing to amend 146.1(2) to accommodate the time necessary for obtaining a SIN?
The 13-month period is not a grace period to acquire the beneficiary's SIN. It is the period in which an ESP trust will remain tax-free if registration is granted. This process is similar to the one used in the past that provided an ESP trust to be tax-free as of the date it was entered into if the contract was submitted for registration no later than 60 days after the end of the year it was entered into. The difference between the old and the new system is that the period for registering the ESP is no longer based on a calendar year but on a consecutive 13-month period. Therefore, as the 13-month period is not a grace period to acquire the SIN, there will be no extensions to the period in which the educational savings plan trust remains tax-free.
The promoter should not submit contracts for registration until all the prescribed information is obtained. Registration is not granted unless all the SINs of all the beneficiaries listed at the point of registration are included. Therefore, for registration to continue, any beneficiary who is added to a contract would have to have a SIN on the day he or she was added to the contract.
The following questions and answers were prepared by the Trusts and Pension Section of the Individual Returns and Payments Processing Directorate.
17. Gifts to a designated educational institution. More specifically, we are looking for general information such as the tax implications of the gift, the requirements for tracking and reporting these transactions, whether a T4A should be issued, and to whom the donation receipt is issued.
Please note that not all RESPs (certain group RESPs) allow for donations to a designated educational institution.
There is no requirement to track and report these transactions. No T4A is issued in these situations, as the donation is made by the trust not the subscriber. Also, no donation receipt is issued, as it is not considered a donation from the subscriber.
18. What is the process for amending previous years' tax forms for RESP (EAPs and AIP-T4A). Do HRDC and the CCRA match their records?
The process for amending T4As for RESP related income is no different than amending any T4 family information slips. If an error is noticed after an information return is filed, amended slips will have to be prepared to correct the information. Clearly identify the new slips as amended slips by writing "amended" at the top. When you amend a slip, make sure you complete all the necessary boxes, including the information that was correct on the original slip. Distribute the amended slips to the client the same way as the originals. Send copy 1 of the slips to any tax centre with a letter explaining the reason for the amendment. Do not send an amended summary when you send in amended slips.
The revised T4A will be updated on our system and, if necessary, individual returns will be reassessed based on the new information. We note, that HRDC does not receive T4A information. However, they are aware of when funds are disbursed from an RESP.
19. How does the CCRA monitor excess contributions to an RESP?
HRDC communicates excess RESP contribution information to the CCRA for action.
20. How is my excess contribution tax penalty linked to my regular annual tax return should I be audited?
Excess RESP contributions are assessed Part X.4 tax on a T1E-OVP return. An annual tax return is basically assessed Part I tax reported on a T-1 return. It is a distinct filing for each return. The only possible link between the two returns is that an amount being refunded from one may be applied to the amount owing of the other.
21. What happens when I submit my overcontribution tax penalty?
If a client has an RESP overcontribution subject to Part X.4 tax, the client must file a T1E-OVP return and pay the applicable tax within 90 days of the end of the year in which there is an overcontribution. Returns filed late are subject to late filing penalties and interest.
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