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U.S. Expatriates with RESPs



U.S. citizens (or even green cardholders) resident in Canada who are contributors (or a joint contributor) to their children’s RESP (“registered educational savings plan”) may have U.S. reporting issues.

Should the RESP be regarded as a foreign trust by the IRS (as they do with RRSPs), then the RESP would be regarded as foreign grantor trust. In this regard the annual income realized in the RES
P including the grants received from the federal government (called CESG) is reportable on your U.S. 1040. In addition to this, IRS Form 3520 -A and/or 3520 information returns would have to be filed.

There may be an argument under the regulations that the RESP is not a trust for U.S. tax purposes., however such defense would have to be made with the return or upon audit or examination by the IRS. If the RESP was not a “trust” under U.S. law, the income reporting above would still be required.

To make things more complicated, if mutual funds are invested in the RESP, then the mutual fund could be a PFIC “(passive foreign investment company”) subject to additional reporting requirements.

With the RESP, if a Canadian non- U.S. person (such as a non-U.S. parent or Canadian grandparent) was the contributor to the RESP, then there is no issue if the child is not a U.S.  person. However, if the child is a U.S. person at the time of distributions from the RESP, then the RESP would be a non-grantor foreign trust (assuming it is a trust for U.S. tax purposes) and the punitive throw-back anti-deferral rules would apply causing punitive tax and interest. This would occur when the child commences post-secondary school and withdraws funds for tuition, etc.

I presume, taxpayers should not be so quick in getting U.S. citizenship for their children born in Canada, at least not until they graduate. Attaining U.S. citizenship puts the child under the U.S. tax reporting umbrella from the get-go. The solution may not to collapse the RESP for existing plans that are regarded as foreign grantor or non-grantor trusts as Canada has repayment provisions for the CESGs. This should be verified with the trustee of the RESP or your financial advisor to determine the Canadian impact.

 

Larry Stolberg

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Larry Stolberg, CPA, CA, CPA (South Carolina), has been practicing as a full-time tax specialist for over 30 years, in the Toronto, Ontario Canada and surrounding GTA area with primary emphasis on:

•Corporate restructuring for business owners
•Estate/succession planning
•U.S. expatriate and cross border issues
•Tax efficient planning that will achieve both your short and long term objectives

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One thought on “U.S. Expatriates with RESPs

  1. Avatar calgary411 says:

    Your paragraph,

    “With the RESP, if a Canadian non- U.S. person (such as a non-U.S. parent or Canadian grandparent) was the contributor to the RESP, then there is no issue if the child is not a U.S. person. However, if the child is a U.S. person at the time of distributions from the RESP, then the RESP would be a non-grantor foreign trust (assuming it is a trust for U.S. tax purposes) and the punitive throw-back anti-deferral rules would apply causing punitive tax and interest. This would occur when the child commences post-secondary school and withdraws funds for tuition, etc.”

    …is of interest. Is it your knowledge and advice, then, that a child born to US parent(s) in Canada (or any other country) has a CLAIM to US citizenship rather than automatic acquisition from birth based on his or her parent(s) birth facts and time in the USA?

    Here is what my US tax lawyer told me for why I was taxed for the Canadian Registered Disability Savings Plan (RDSP) that I hold on behalf of my Canadian-born son whose birth was never *registered* with the US, who never lived a day in the US, who never had any benefit from the US.

    “This is the way the Canadian RDSP (as well as the RESP) is taxed by the US for US Persons in Canada:

    1. If the sponsor / Holder of an RDSP (or RESP for that matter) is a US person then (US person analysis of the beneficiary is irrelevant):

    a. The income generated by the RDSP is taxed to the US person sponsor currently as it is earned

    b. The grant is taxed to the US person sponsor when it is distributed to the beneficiary

    c. US person sponsor must file 3520A annually

    d. US person sponsor must file 3520 annually

    2. If the sponsor / Holder of a RDSP (or RESP) is NOT a US person, AND the beneficiary is a US person then:

    a. The income generated by the RDSP (RESP) is taxed to the US beneficiary currently as it is earned

    b. The grant is taxed to the US person beneficiary when it is distributed

    c. US person beneficiary must file 3520 annually (no 3520A)

    Neither RDSPs nor RESPs are covered by the Canada / US Tax Treaty.

    I was also advised that my children were US citizens from their first breath whether or not they were ever registered as *US births abroad*.”

    P.S. Although all others of my family have now renounced our extraneous US citizenship (at great cost with both the fee for the right to do so and the compliance required to file Form 8854), my son IF THE ADVICE I GOT IS CORRECT, is entrapped into a non-meaningful US citizenship without consent. I am told that he could not renounce for any amount of $$$ paid to any US tax lawyer, US tax accountant or US immigration/nationality lawyer as he does not have the *requisite mental capacity* to do so and a parent, a guardian or a trustee cannot act on such a person’s behalf.

    Why, oh why, is there so much conflicting advice given by US tax professionals? Why are *Accidental Americans* in this situation when they have not given their fully-informed consent as ADULTS and with REQUISITE MENTAL CAPACITY to make such a decision?

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