2 May 2006 External T.I. 2006-0182811E5 - Part X.5 RESP Tax on Accumulated Income Payments

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Can the Agency provide any relief from the taxes applied under Part X.5 of the Act?

Position: No.

Reasons: The law is clear and intended to apply to all RESPs that make accumulated income payments.

XXXXXXXXXX 						2006-018281

May 2, 2006

Dear XXXXXXXXXX:

Re: The Unfair Treatment of RESPs Subscribed to Prior to 1990

This is in response to your letter of February 23, 2006 wherein you request our assistance in dealing with certain potential negative implications, which in your view were likely unintended, in the administration and application of the rules governing registered education savings plans ("RESP") for plans registered prior to 1990.

You are of the view that the 20% tax under Part X.5 of the Income Tax Act (the "Act") should not apply to pre-1990 RESPs because it was enacted in 1998 and subscribers may have acted differently if the tax had been in effect at the time that amounts had been contributed to the RESPs. You also support your view with the fact that, at the time the subscribers contributed to the RESPs, the Act did not contemplate a "reasonable amount" criterion which may have affected the actions of subscribers. In addition, certain subsequent amendments to the RESP provisions within the Act included grandfathering treatment and you believe that grandfathering from the Part X.5 special tax should have been provided to the pre-1990 RESPs.

Comments

An educational assistance payment (EAP) is defined in subsection 146.1 of the Act, in general, as an amount, other than a refund of payments, paid out of an education savings plan to or for an individual to assist the individual to further their education at a post-secondary school level. The requirement that an EAP be for the purpose of assisting the individual to further the individual's education at a post-secondary school level was present in 1985 and continues to be required when EAPs are paid out of an RESP today.

In your letter you mention that the "reasonable amount" criterion in respect of EAPs was first introduced by CRA in 1998. EAPs paid out of an RESP must first satisfy the requirement that the EAP is for the purpose of assisting the individual to further their education at a post-secondary school level and an EAP must also be reasonable based on the facts in a particular fact situation. The administrative condition that an EAP must also be reasonable based on the facts in a particular fact situation has always been present and is not a condition that was only implemented in 1998.

Where an amount is paid out of an RESP to an individual and the amount paid does not satisfy the definition of EAP for purposes of section 146.1 of the Act and the amount is not reasonable based on the facts in a particular fact situation, the amount paid would either be a refund of payments or an accumulated income payment and be treated for tax purposes accordingly.

Where an amount paid out of an RESP is an accumulated income payment, as defined in subsection 146.1(1) of the Act, the provisions of Part X.5 are very clear in that it charges a special 20% tax on accumulated income payments. However, subject to a $50,000 lifetime limit, the tax can generally be reduced to the extent that the recipient of an accumulated income payment makes deductible registered retirement savings plan ("RRSP") contributions under subsection 146(5) or (5.1) for the year in which the payment is made. If the recipient does not take advantage of this exclusion then Part X.5 applies to the accumulated income payment.

The 1997 Budget Supplementary Information provided by the Department of Finance states that the proposed amendments to the RESP provisions of the Act were to encourage savings for education through RESPs and to entice parents and others who were reluctant to contribute to RESPs because of the risk of forfeiture of their investment income if their child did not go on to post-secondary education. These amendments allowing all subscribers to access RESP investment income under the 1997 proposed amendments were extremely beneficial to the subscribers of the pre-1990 RESPs. Under the pre-1998 rules, subscribers did not have access to the accumulated income in the RESPs because the income earned by the RESP had to be paid to another eligible student or to an educational institution.

In addition to providing the many beneficial amendments to the RESP provisions of the Act, the 1997 Technical Notes issued by the Department of Finance state that "the purpose of this tax (Part X.5) is to discourage the use of RESPs strictly for their tax deferral advantages, particularly in regard to individuals who already maximize the tax advantages for retirement savings that are associated with RRSPs". There is no doubt that the pre-1990 RESPs benefited from the tax deferral advantages and it is apparent that the Department of Finance would have been aware of this fact when it introduced the Part X.5 special tax.

You have noted that grandfathering was considered and provided for some of the provisions enacted subsequent to 1990. We are of the view that the Department of Finance would have considered whether any RESPs should have been grandfathered from the application of the special tax under Part X.5 of the Act. The fact that the limited RRSP contribution reflects the only exclusion from the special tax under Part X.5 is a clear indication of the intent of the legislation.

We are of the view that the special tax under Part X.5 will apply to any accumulated income payments paid out of RESPs, including the pre-1990 plans. We have forwarded a copy of your letter and our response to the Department of Finance for its consideration of your concerns from a tax policy perspective.

We trust that the above comments will be of assistance to you.

Yours truly,

Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate

c.c. Mr. Dave Wurtele - Department of Finance