28 April 1995 Internal T.I. 9433776 - RESP OVER-CONTRIBUTION TAX AFTER DEATH

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1.Whether Part X.4 tax exigible with respect to overcontributions made by subscriber who has since died.

2.Whether overcontributions to RESP by subscriber's estate or resulting from life insurance proceeds paid in on subscriber's death are taxable under Part X.4.

Position TAKEN:

1. Yes, and enforceable to extent provided by subsection 159(2) of the Act.

2. No Part X.4 tax because there is no "subscriber".

Reasons FOR POSITION TAKEN:

1. Routine

2. Part X.4 tax applicable only to "subscriber".

			April 28, 1995

HEADQUARTERS HEADQUARTERS
Registered Plans Division P. Spice
Richard Rainville (613) 957-8953
Chief, Audit Section
Attention: Allan Wong
943377

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This is in reply to your memorandum of December 23, 1994, in which you ask us for an interpretation of the Income Tax Act provisions relating to "registered education savings plans" ("RESP's") and, in particular, the Part X.4 tax on overpayments to RESP's.

You enclosed copies of a memorandum of December 14, 1994, from the Toronto District Office Business Audit Section, and the working papers attached thereto relating to an audit of the above-named RESP promoter. The auditor requested assistance in determining whether Part X.4 tax was payable and, if so, who was liable to make the payment in the instances described in the memorandum. On April 6, 1995, you forwarded a copy of a specimen Scholarship Agreement (dated 1988?) used by

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Given the date of the specimen, however, it does not include the maximum annual and lifetime contribution limits, and does not reflect the Income Tax Act requirements to which the parties to the RESP's described below were subject. Before making a final decision with respect to the audit you should obtain the actual Scholarship Agreements signed by the individual subscribers who are discussed in the audit report and a copy of the prospectus in force at the time the scholarship agreements were executed.

Following is an outline of the facts, the applicable law, the departmental requirements and positions, and our analysis and conclusion.

FACTS

There are three situations with which the auditor is concerned. All RESP's described below were entered into after February 21, 1990 (relevant date for purposes of the annual and lifetime maximum contributions rates contained in both sections 146.1 and 204.9). The situations are:

1.Subscriber A over-contributes to three RESP's in respect of one beneficiary in each of 1990, 1991 and 1992. He dies in 1994. No return is filed or tax paid in accordance with section 204.92 of the Act.

2.Subscriber B elects to take out life insurance which, in the event of the subscriber's death, pays a lump sum amount into the Subscriber's Savings Account (see below) or to the XXXXXXXXXX equal to the amount which would have been paid by the subscriber in instalments from the date of death to the end of the term of the RESP. The policyholder of such insurance is the Foundation which is the trustee which holds the property for the education savings plan.

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3.Subscriber C provided in his will that upon his death his executor pay

If it is possible...the commuted value of the annual deposits remaining payable by me under the...Scholarship Agreement....(and) if it is not possible to pay such annual deposits on a commuted basis, to set aside from the residue of my estate and hold in a fund such amount not exceeding the total of the unpaid deposits remaining payable by me under the...Scholarship Agreement which...will be sufficient together with the net income of such fund to pay such unpaid deposits as same become due...

The subscriber had entered into the RESP in March 1991 and had agreed to pay 17 instalments of $1160.00 each with a maturity date of July 2007. He died September 1991, and in January 1992 the Promoter wrote the Estate to confirm the amount due under the RESP in order that it be completely paid up; the Estate paid the amount of $6070 in February 1992. In April 1992, the Promoter quoted the amount of $1,146.65 to "convert" the RESP from a yearly deposit frequency to a "one time" deposit frequency. The Estate paid this fee (described as an "interest adjustment") in May 1992.

The Prospectus provides (see "Conversion of Deposit Method") that a subscriber may change deposit methods "subject to the maximum deposits permitted under the Act".

INCOME TAX ACT

"Education savings plan" is defined in subsection 146.1(1) of the Act and is basically a contract between an individual called a "subscriber" and a person or organization called the "promoter" under which the subscriber agrees to make a payment of a periodic or other amount to the promoter, and the promoter agrees to provide educational assistance payments to a beneficiary.

Section 146.1 refers to the subscriber's "heirs, executors or assigns" in the definition of "refund of payments" in subsection (1) thereby qualifying such persons for exemption from tax on these refunds in accordance with paragraph 81(1)(o) of the Act.

Subsection 146.1(2) describes the conditions for registration of an education savings plan and, among other things, requires that the plan provide that no payments may be made into the plan "by or on behalf of a subscriber" after 21 years following the year the contract is entered into (paragraph h) and that the plan provide that the total of all payments made into the plan in respect of a beneficiary for a year shall not exceed $1,500 (paragraph k).

Subsection 146.1(14) of the Act requires that upon revocation of the registration of an education savings plan, certain amounts (basically post-72 income earned in the plan) are brought into the subscriber's income. The trust described in subsection 146.1(1) of the Act will be subject to tax on its income for the year it was revoked and for subsequent years - see definition of "trust" in subsection 146.1(1) and the exemption from tax described in subsection 146.1(5) of the Act.

Section 204.9 imposes a tax on a subscriber with respect to a "subscriber's share of the excess amount" in respect of a beneficiary. This is a subscriber's proportionate amount of all payments made to all RESP's by "or on behalf of" all subscribers in the year in relation to one beneficiary. The excess amount in a year is the total of all such payments by all subscribers minus the lesser of 1) payments in the year in excess of $1500 and 2) the amount, if any, in excess of $31,500 paid with respect to one beneficiary in all preceding years.

Finally, section 204.91 provides that "each subscriber" shall pay a tax on the subscriber's share of each excess amount to the extent that "the amount of the share is not withdrawn from the plan".

DEPARTMENTAL REQUIREMENTS AND POSITIONS

Information Circular 93-3 (the "Circular") sets out various requirements which must be met by a plan before registration will be granted (see paragraphs 16 through 20 of the Circular). One of these is that the subscriber to an RESP cannot change. The RESP can, however, provide that on the death of the subscriber the subscriber's heirs, executors, administrators, or other legal representatives can "continue the plan on behalf of the subscriber" (see paragraph 17).

At Part II of the Circular ("Registering Contracts") in paragraph 36 it is stated that "once a contract is registered, it will remain registered as long as the contract exists and registration has not been revoked".

In commenting on the reference to "heirs, executors or assigns" in the definition of "refund of premiums", we advised you by memorandum of March 9, 1983 (copy enclosed), that the phrase was to be read only in the context of the definition; it was our view that the word "assign" did not refer to an assignee for consideration but rather to the named beneficiary of the RESP. We went on to state that the subscriber could be permitted to assign for consideration the right to a refund of payments, but assignment of the right to designate the beneficiary under the plan could subvert the purpose for which the plan was originally set up and should be resisted.

On May 13, 1983, we wrote the lawyers for a proposed RESP XXXXXXXXXX that an assignee of an RESP is not the "subscriber" as that word is used in section 146.1 and, therefore, would not acquire the right to designate the beneficiary under the plan. (Copy of letter enclosed).

Finally, you asked us to comment on a letter to you of July 29, 1988, from the lawyers for the XXXXXXXXXX RESP, in which they stated that the heirs and legal representatives of a deceased subscriber would be granted the right under the RESP "to contribute in the Plan and the right to change the Beneficiaries". In your memorandum to us of October 25, 1988, you mention that "we allow a subscriber's heirs, executors, administrators or other legal representatives to assume the subscriber's rights under an RESP on the death of the subscriber" but you do not delimit what rights are assumed. In answer to your memorandum, we state in our's of November 24, 1988, that we concur with your views. The issue there was whether such heirs, etc. must be individuals or could also include corporations or societies. (Copies of correspondence enclosed); the issue of whether someone other than the subscriber could or should make payments into the RESP after the subscriber died was not addressed.

ANALYSIS - GENERAL

The Act defines an RESP as a contract between the promoter and the subscriber. The penalty tax under Part X.4 requires the existence of a subscriber. Although the Act acknowledges that payments can be made "on behalf of the subscriber" by someone else these particular provisions are worded broadly because they are intended to prevent certain activities. To explain, the reference to payments "on behalf of the subscriber" are made in the calculation of the excess amounts which are subject to the Part X.4 tax and in paragraph 146.1(2)(h) of the Act which requires that no payments to the RESP be made after 21 years following the year the RESP is created. Such prohibitions are worded broadly so that a subscriber cannot circumvent the provisions by having someone else make payments into the RESP.

The Department in the Circular allows certain parties to "continue" the RESP after the date of the subscriber's death. Of course, this position is relevant for the express legislative provision respecting the "return of payments" exemption from tax under paragraph 81(1)(o) of the Act which enures to the benefit of the subscriber's heirs.

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To conclude, the Act does not permit payments in excess of $1500 per annum in respect of a beneficiary and it is a condition for registration and continued registration that the plan contain this requirement. Even where the Part X.4 penalty tax cannot be enforced, the Department is in a position to revoke the RESP's registration in cases where payments by the subscriber's heirs or payments under the subscriber's life insurance exceed the maximum payment limits.

1. Analysis with Respect to Situation 1

There is nothing unique in the Act with respect RESP's and unremitted taxes and their status should the taxpayer die before the returns are filed and the taxes, interest, and penalties paid. Reference should be made to subsection 159(2) of the Act respecting the personal liability of the executor and the requirement for a clearance certificate from the Department before the final distribution from the estate is made. We note the auditor's comment that the accountant is under the impression that a clearance certificate is not required for tax liabilities arising after death. However, Subscriber A over-contributed in 1990, 1991 and 1992. The tax liability arose, therefore, at the end of the month in 1990 in which the first over-contribution existed; at the time of death in 1994 taxes would be owing on the total of all over-contributions up to and including the last amount contributed in 1992. Subsection 159(2) of the Act refers to "all amounts for which any taxpayer is liable under the Act" and this would include the taxes in accordance with section 204.91 and the interest and penalties in accordance with subsections 161(1) and (11) and subsection 162(1). The interest and penalties provisions are applicable by virtue of section 204.93 of the Act.

In addition, the subscriber's interest in the RESP is considered a capital property and there is a deemed disposition of the right upon death in accordance with subsection 70(5) of the Act. However, since the value of the right (i.e. the aggregate of the subscriber's payments into the RESP) cannot exceed the adjusted cost base (acb) of the right, there will be no capital gain. Furthermore, it is unlikely the value of the right will be less than the acb unless it can be shown that the trust's ability to return the subscriber's payments is impaired at the time of death, and therefore a loss is unlikely to arise. In any event, if a loss is proved, it will deemed to be nil in accordance with subparagraph 40(2)(g)(ii) of the Act.

2. Analysis with Respect to Situation 2

The specimen contract (Scholarship Agreement) provides that the subscriber can take out life insurance which will provide for a fully paid up contract upon the subscriber's death.

The Prospectus limits the types of benefit that the life insurance can provide since it states that any payments under the insurance must respect the maximum contribution limits (i.e., the $1500 per year and $31,500 lifetime).

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We reviewed our files and found two prospecti from 1987 and 1988 XXXXXXXXXX

In the former prospectus, a description of the insurance payable on the death of the subscriber explains that it is to be used to apply to the costs of the first year of post-secondary education and is payable to the subscriber's estate. In other words, it could not be used to pay up the RESP into which the deceased subscriber had entered. The 1988 prospectus described the life insurance proceeds as a benefit "in addition to all rights to scholarships under the XXXXXXXXXX Plan". Again, the amounts were not used to convert the RESP to a fully-paid plan on the subscriber's death.

The Act requires a "subscriber" for purposes of the Part X.4 tax. (The joint and several liability provisions of subsection 160(1) of the Act do not apply with respect to Part X.4 tax.) The only remedy to force compliance is the authority to revoke the RESP's registration.

3. Analysis with Respect to Situation3

With respect to payment under a will, the testator provided for the contingency that if a lump sum equal to the "commuted value of the annual deposits remaining payable by me" could n ot be paid, then the executor could invest the required amount and pay the unpaid deposits as they become due. The Promoter agreed to convert the RESP contract from one requiring annual payments to one permitting a payment in full.

The solution is the same as with respect to Situation 2.

CONCLUSION

Our views with respect to each of the three situations are:

1. Subscriber A was the taxpayer who was liable for any Part X.4 tax due for the 1990 through 1992 taxation years. This liability existed at death and, thus, in accordance with subsection 159(2) of the Act, could have been enforced against the estate.

2. No one is liable for the Part X.4 tax relating to the life insurance payments, but the RESP's to which such excess amounts were contributed are subject to revocation for failure to comply with the registration condition contained in paragraph 146.1(2)(k) which prohibits payments into the plan in excess of $1,500 per year per beneficiary. In addition, the requirement in paragraph 146.1(2)(e) of the Act that the plan be substantially similar to the type of plan described in the prospectus filed by the promoter with the securities commission may have been contravened - however, we do not have a copy of the Scholarship Agreement which would have been signed after February 20, 1990, nor do we have a copy of the Prospectus which subsisted at the time the individual RESP contracts were entered into, so we cannot verify this.

3. As discussed in relation to the situation in 2 above, no one is liable for the Part X.4 tax relating to the payments under the will. Revocation of the RESP may also be available on the same basis as explained under 2 above.

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for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch