20 August 1997 External T.I. 9720735 - RESP INCOME ALLOCATION

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:

Is there a requirement that income earned by an RESP trust be accounted for allocation purposes?

Position:

No

Reasons:

The RESP trust is exempt from tax under Part I by virtue of 146.1(5).

                                          	972073
XXXXXXXXXX	 	                                 M.P. Sarazin

Attention: XXXXXXXXXX

August 20, 1997

Dear Sirs:

Re: RESP Income Allocation

This is in reply to your letter dated July 18, 1997 which has been forwarded to us by the Registered Plans Division, wherein you requested our comments with respect to the accounting for property held in a registered education savings plan ("RESP").

In our telephone conversation (XXXXXXXXXX/Sarazin) of August 19, 1997, we confirmed that your concerns relate directly to the administration and accounting for property held within RESPs. We can only comment on how the Income Tax Act (the "Act") would generally apply to RESPs.

For plans to be accepted for registration as an RESP under the Act, and to remain registered, a trust established under the plan must hold property for the purposes specified in the Act. Under the provisions of subsections 146.1(5) and (6) of the Act, an RESP trust and the subscriber to the particular RESP trust are not subject to tax under Part I of the Act on the taxable income earned in the taxation year by the RESP trust. Unless the registration of the plan is revoked, there is no requirement under the Act that an RESP trust report or allocate the various types of income from property (i.e. interest, dividends or capital gains) earned in the taxation year.

With respect to the taxation of payments made out of an RESP, we refer you to paragraphs 57 to 62 of Information Circular 93-3. Neither the beneficiary or the subscriber of the RESP is required to pay tax on the portion of the payment that represents a refund of the subscriber's deposits (the "capital element") to the RESP trust. However, any amounts paid out of the RESP that does not represent the capital element will be taxed in the hands of the recipient under paragraph 56(1)(q) of the Act. The taxable amount would represent the income earned with respect to the capital element held by the RESP. Where, as result of losses, the capital element exceeds the fair market value of the property held by the RESP, the amount paid out of the RESP trust would not be taxable because the full amount would constitute a return of the capital element from the RESP trust.

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

Yours truly,

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

c.c.S. Robidoux

Registered Plans Division