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: The issue is whether a subscriber will be liable for Part X.4 tax on a contribution where the contribution is deemed to have been made by the subscriber in respect of a much younger beneficiary who was not alive at the time the original contribution was made.
Position: In this case, an "excess amount" as defined in paragraph 204.9(1)(a) of the Act does not arise because total contributions do not exceed the RESP annual limit or the RESP lifetime limit. The legislation provides that contributions previously made to the plan for the former beneficiary are taken into account in determining overcontributions and unused limits with respect to the new beneficiary even when the periods are prior to the birth of the new beneficiary.
Reasons: An "excess amount" as defined in subsection 204.9(1) of the Act does not arise as the RESP annual limit was not exceeded nor was the RESP lifetime limit exceeded.
May 24, 2013
Mr. Mark Legault K. Podor
Manager, Registered Plans Directorate Income Tax Rulings
Directorate
(905) 721-5206
2013-047636
Registered Education Savings Plan (RESP) Part X.4 tax
This memorandum is in response to your correspondence dated January 29, 2013 wherein you requested our opinion regarding the Part X.4 tax implications to a subscriber of an individual registered education savings plan ("RESP") where an existing beneficiary is replaced with a younger beneficiary.
Facts
The facts provided are as follows:
- On December 31, 1999, a grandparent entered into an individual RESP with a promoter on behalf of his or her grandchild.
- In 2000, the grandparent made a one-time contribution of $XXXXXXXXXX in respect of the existing beneficiary of the RESP.
- In 2013, the existing beneficiary is over 21 years of age and the subscriber wishes to replace the existing beneficiary of the RESP with a new beneficiary, a great-grandchild, who is XXXXXXXXXX years of age.
- At this time, the grandchild and great-grandchild have not exceeded their RESP lifetime limit.
If the subscriber replaces the existing beneficiary with the new beneficiary, it is your understanding that paragraph 204.9(4)(a) of the Income Tax Act (the "Act") applies as both beneficiaries are not under 21 years of age and the beneficiaries do not share a common parent.
You request confirmation of whether an "excess amount", as defined in subsection 204.9(1) of the Act, arises in this situation. In particular, you wish to determine whether the subscriber will be liable for Part X.4 tax on the $XXXXXXXXXX contribution where the contribution is deemed to have been made by the subscriber in respect of a much younger beneficiary who was not alive at the time the original contribution was made.
Part X.4 of the Act provides for a tax to be paid by a subscriber with respect to overpayments made to an RESP. The Department of Finance intended this tax to limit the amount of tax-deferred income that may be accumulated for any one beneficiary.¹
Subsection 204.9(4) of the Act applies where a subscriber changes the beneficiary under an RESP. Under paragraph 204.9(4)(a) of the Act, if an individual (the "new beneficiary") becomes a beneficiary under an existing RESP and replaces an existing beneficiary (the "former beneficiary") who ceases to be a beneficiary of the plan, all of the contributions into the RESP for the former beneficiary are also considered to be contributions for the new beneficiary when determining whether or not an "excess amount" exists for the new beneficiary, unless either of the conditions in subparagraphs 204.9(4)(b)(i) or (ii) of the Act apply. Based on the facts provided in your request, we agree that paragraph 204.9(4)(a) of the Act will apply in this case because neither of the conditions in subparagraphs 204.9(4)(b)(i) or (ii) of the Act would apply.
Subsection 204.9(1) of the Act defines the term "excess amount" for purposes of Part X.4 of the Act. An "excess amount" for a year in respect of an individual who is a beneficiary under one or more RESPs is the amount on which tax is payable by all subscribers under Part X.4 of the Act on their gross cumulative excess in respect of contributions made to all RESPs in that year for the individual.
Your facts indicate that the subscriber made a single contribution of $XXXXXXXXXX in respect of the former beneficiary in 2000. The definition of "excess amount" in paragraph 204.9(1)(a) of the Act applies to contributions made in taxation years prior to 2007. Under paragraph 204.9(1)(a), an "excess amount" will arise if total contributions for the individual either exceeds the "RESP annual limit" for the year, or causes the "RESP lifetime limit" for the year to be exceeded. For the 2000 year, these limits were $4,000 and $42,000, respectively.
In this particular situation, it is our view that an "excess amount", as defined in paragraph 204.9(1)(a) of the Act, does not arise. Total contributions for the 2000 year made in respect of the beneficiary of the plan do not exceed the RESP annual limit for that year. In addition, total contributions in respect of the new beneficiary and those contributions in respect of the former beneficiary that are deemed to have been made in respect of the new beneficiary by all plan subscribers do not exceed the new beneficiary's RESP lifetime limit. The definition of an "excess amount" in subsection 204.9(1) of the Act does not contain any conditions that require an individual beneficiary to be alive in the years the original contributions were made.
You refer to your published response to question 8(c) on the Canada Revenue Agency (the "CRA") website, "Frequently Asked Questions (FAQ) Registered Education Savings Plans (RESPs)", regarding the possible tax consequences of transfers of contributions between plans.² The response to question 8(c) on the CRA website states that it could be possible to have excess contributions where contributions are attributable to a much younger beneficiary who might not have been alive at the time the original contributions were made. We agree that an "excess amount" for an individual could arise in a year where, for example, total contributions exceed the RESP annual limit for the year (in respect of those years where the RESP annual limit applies) and where total contributions made by all subscribers in respect of an individual in the year and all preceding years exceed the RESP lifetime limit for the year.
We trust these comments are helpful.
Yours truly,
Lita Krantz, CPA, CA
Assistant Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Endnotes:
¹ Department of Finance explanatory notes 1997 Budget:
http://www.fin.gc.ca/drleg-apl/wmmbud07n_1-eng.asp
² CRA website, "Frequently Asked Questions (FAQ) Registered Education Savings Plan (RESPs)", question 8(c):
http://www.cra-arc.gc.ca/tx/rgstrd/resp-reee/fq-eng.html#transfers
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