29 July 1998 External T.I. 9810645 - RESP PAYMENTS OF ACCUMULATED INCOME

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:

Various questions resulting from the proposed amendments to the legislation on RESPs.

Position:

Provided general replies with the caution that they are based on proposed legislation.

Reasons:

Analysis of Draft legislation.

XXXXXXXXXX 		981064
W. C. Harding
Attention: XXXXXXXXXX 

July 29, 1998

Dear XXXXXXXXXX:

Re: Registered Education Savings Plans (“RESP”)

This is in reply to your facsimile of March 11, 1998 addressed to Ms Sue Wormington of Revenue Canada’s Client Services Directorate. We were requested to reply to questions 1, and 3 through 10 of the second section of your request. We understand responses to the remaining questions have been provided to you by others.

Your questions and our replies thereto follow below. However, we wish to note that your questions and our replies are based on legislation contained in Bill C28 which became law on June 18, 1998 and on proposals contained in the Notice of Ways and Means tabled with the 1998 Budget. Since the Notice of Ways and Means has not been passed into law as of the date of this letter, our comments are subject to change should the legislation not be enacted as we presently understand it.

It should also be noted that a subscriber will also be subject to the specific terms of an RESP which may limit the subscriber’s rights to undertake various transactions. This factor is not considered in our replies.

Question 1.

Can an RESP account be assigned as collateral?

Reply 1.

The conditions for the registration of RESPs are described in paragraphs 14 through 20 of Information Circular 93-3. Property of a trust governed by an RESP must be irrevocably held by a trust for one or more of the purposes listed in paragraph 14 and in our view it would appear that these purposes will generally preclude any RESP funds being assigned as collateral. However, it will ultimately be a financial institution that will determine if an RESP account is acceptable collateral. There are no provisions in the Income Tax Act (the “Act”) for RESPs that are comparable to subsection 146(10) of the Act for RRSPs.

Question 3.

Can contributions to an RESP continue to be made while the beneficiary is already enrolled in university?

Reply 3.

Under the Act a subscriber is only restricted from making contributions after the 21st year following the year the plan was established. Therefore, if the terms of a plan permit, contributions could be made within this period even if the beneficiary is enrolled in university.

Question 4.

Regarding rollover of accumulated interest, how long do the funds have to stay in the RRSP so that the 20% tax does not apply.

Reply 4.

Where an amount is deducted under subsection 146 (5) or (5.1) of the Act and the tax under Part X.5 of the Act is thereby reduced, there is no restriction on how long an amount must remain in the RRSP.

Question 5.

If an RESP was previously set up for one child and a new plan is set up for a younger sibling, can funds be transferred from the one plan to the other? What would the maturity and termination dates be for each plan?

Reply 5.

An RESP can accept transfers of property from another plan. However, new paragraph 146.1(2)(I.2) of the Act will prevent such transfers after the transferor plan has made any accumulated income payments.

Subsection 146.1(6.1) of the Act provides rules with respect to the transfer of funds from one RESP trust (the “transferor plan”) to another (the “transferee plan”). The law prior to the enactment of Bill C28 provided that for the purposes of determining the 21 year contribution period under paragraph 146.1(2)(h) of the Act and the termination date under paragraph 146.1(2)(i) of the Act, the transferee plan will be deemed to have been entered into on the earliest of the day it was actually entered into or the day on which the transferor plan was entered into. In your example, the Act will deem the new plan to have started on the day the old plan was entered into. This rule is now extended for the purposes of new subparagraph 146.1(2)(d.1)(vi) of the Act which may apply to restrict the payment of accumulated income from an RESP to years following the 9th year after a plan is entered into.

New paragraph 146.1(2)(i.1) of the Act requires an RESP to be terminated before March of the year following the first payment of accumulated income made in accordance with paragraph 146.1(2)(d.1) of the Act.

Question 6.

Have the annual and lifetime limits been increased retroactively for all RESPs or are existing plans subject to the previous limits?

Reply 6.

The RESP annual limit is applicable to contributions made in a particular year to any RESP. It is not dependent on when any RESP was entered into. For contributions made in 1990 to 1995 the limit was $1,500. For 1996 the limit was $2,000 and for 1997 and beyond it is $4,000.

The RESP lifetime limit is also determined with respect to the year in which it is being applied regardless of when any of the RESPs in question were entered into. For 1990 through 1995 the limit was $31,500 and for 1996 and beyond the limit is $42,000.

In respect to the calculation of excess RESP contributions these limits apply to the sum of all contributions made by all subscribers in respect of any particular beneficiary.

Question 7.

Information Circular 93-3 specifies that an educational institution must be named to receive income that is not payable to a beneficiary. Is this still a requirement where the RESP income is fully payable or not fully payable to the subscriber on the plan’s termination?

Reply 7.

It is our understanding that this requirement will be removed in the near future.

Question 8.

The limitations on contributions to an RESP and the termination of RESPs are expressed in years. Are these Calendar years?

Reply 8.

Yes.

Question 9.

If an RESP is set up for one child and another plan is subsequently set up for another child, what effect will a transfer of funds from one plan to the other have on the number of years contributions can be made and on the termination dates of the plans?

Reply 9.

Please see our response to question 5.

Question 10.

If an RESP subscriber requests termination of a plan before its maturity, will:

a. grants received be returned to the Government;

b. contributions be returned to the subscriber; and

c. income be paid to an educational institution named by the subscriber?

Reply 10.

Paragraph 146.1(2)(a) of the Act provides that a condition for registration of an ESP is that the property of the ESP (net of any applicable charges) must be irrevocably held for the purposes specified under the definition of “trust” in subsection 146.1(1). It is therefore not possible for an ESP to be registered which allows a subscriber to revoke a plan although it is permissible under the Act for a subscriber to cease contributing. However, draft subsections 146.1(12.1) through (13) and subsection 146(14) of the Act provide rules for the revocation of an RESP and the taxation of an RESP and its subscriber where the plan no longer complies with the provisions for RESPs. Basically, on a revocation of registration, a subscriber will be taxable on the value of the property held in the plan to the extent it exceeds the net contributions made to the plan. In addition the ESP trust will become taxable. There is no requirement in the Act that requires the property of the trust be paid to the subscriber or to an educational institution.

It is our understanding that any grants would have to be repaid.

We trust these comments will be of assistance.

Yours truly,

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

cc Sue Wormington
A/Manager, Specialty Publications Section
Client Services Directorate