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: Whether all payments of income made out of an RESP is subject to Part X.5 tax.
Position: Yes, unless eligible as an RRSP deduction or rollover to an RDSP
Reasons: The law is clear and intended to apply to all RESPs that make accumulated income payments.
March 5, 2013
Re: 20% Tax on Accumulated Income Payments
This is in response to your request for confirmation of the application of a 20% additional tax on accumulated income payments that you intend to withdraw as the subscriber of a registered education savings plan ("RESP"). You also enquire whether a grandfathering provision exists for this tax for plans registered in 1989.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. We are, however, prepared to offer the following general comments, which may be of assistance.
Where an amount is paid out of an RESP to an individual and the amount paid does not satisfy the definition of an educational assistance payment as provided for in subsection 146.1(1) of the Income Tax Act (the "Act") the amount paid would generally be either a refund of payments, or an accumulated income payment (an "AIP").
Where an amount is an AIP, as defined in subsection 146.1(1) of the Act, the provisions of Part X.5 of the Act are very clear in that a special 20% tax on the AIP is payable. Where the RESP allows AIPs, the payment cannot be made as a single joint payment to separate subscribers. When more than one individual is entitled to receive AIPs from the plan, the payments must be made separately to each person. An RESP account must be terminated by the end of February of the year after the year in which the first AIP is paid.
Subject to certain conditions, the Part X.5 Tax can generally be reduced to the extent that the recipient of an AIP makes deductible registered retirement savings plan ("RRSP") contributions for the year in which the AIP is received or rolls over RESP investment income to a Registered Disability Savings Plan ("RDSP"). If the recipient does not take advantage of these exclusions then Part X.5 Tax applies to the AIP.
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 former 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.
There is no grandfathering provision to exclude pre-1990 RESP plans from Part X.5 Tax. Consequently, Part X.5 Tax will apply where, in fact, the payments made to you are AIP's and you are not able to make deductible RRSP contributions or an RDSP rollover as noted above.
We trust these comments will be of assistance to you.
Lita Krantz CPA, CA
Deferred Income Plans Section II
for Director, Division 40
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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