18 February 1999 External T.I. 9817325 - 1998 RESP AMENDMENTS

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: General questions on 1998 RESP amendments

Position: Provided general replies.

Reasons: General explanation of recent legislative changes was needed

XXXXXXXXXX 		981732
W. C. Harding
Attention:  XXXXXXXXXX 

February 18, 1999

Dear Sirs:

Re: Registered Education Savings Plans ("RESPs")

This is in reply to your letter of June 24, 1998, in which you asked a series of questions in respect of RESPs. Our replies to your questions follow below. However, please note that our replies are partially based on proposals contained in the Notice of Ways and Means Motion tabled in December 1998 which has not yet been passed into law. Accordingly, our comments are subject to change should the legislation not be enacted as proposed.

Question 1

(a) Can contributions be made to an RESP after the 21st year the plan was entered into?

(b) Must a plan end on or before the last day of the 25th year after the plan was entered into?

(c) Are family plans (i.e. plans that allow more than one beneficiary) bound by the same restrictions?

(d) If the answer to (c) is yes, how does this effect transfers between plans with different start dates?

(e) If contributions are made to a family plan in the name of a beneficiary under the plan who has not attained the age of 21 while another beneficiary is 21 years of age or older and receiving educational assistance payments ("EAPs"), are subsequent contributions made to the plan available in respect of the older beneficiary?

Our Reply

(a) Paragraph 146.1(2)(h) of the Income Tax Act (the "Act") provides that no payments may be made into an RESP by or on behalf of a subscriber after the 21st year following the year in which the plan is entered into.

(b) Paragraph 146.1(2)(i) of the Act provides that an RESP must be terminated on or before the last day of the 25th year following the year in which the plan was entered into.

(c) Subsection 146.1(2) of the Act provides conditions (including those referred to above) for the registration of all RESPs including family plans. It should be noted that specific conditions for family plans are also provided in paragraph 146.1(2)(j) of the Act.

(d) 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 subsection provides that for the purposes of determining the contribution period under paragraph 146.1(2)(h) of the Act and the termination date under paragraph 146.1(2)(i) of the Act, a 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. The provision has been further amended to provide that these rules will also apply 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.

You should also note that while an RESP can accept transfers of property from another plan, new paragraph 146.1(2)(i.2) of the Act will prevent such transfers after the transferor plan has made any accumulated income payments including payments made by way of cash and/or transfer to an RRSP.

(e) The Act does not restrict payment of EAPs to specific beneficiaries under a family plan. Accordingly, a plan may provide for the payment of EAPs to a beneficiary of a family plan who is over 21 years of age and in doing so take into account contributions made in respect of beneficiaries that are under 21 years of age. However, new paragraph 146.1(2)(j)(iii) will prevent individuals from becoming members of a family plan at any time if they are 21 years of age or older and they were not immediately before that time beneficiaries of another family plan.

Question 2

Plans established after 1997 are permitted to have joint subscribers. Can plans established prior to 1997 be transferred to plans with joint subscribers?

Our Reply

The Act does not preclude transfers of amounts from pre 1998 plans to plans established after 1997 that have joint subscribers.

Question 3

How do the revisions to the annual and lifetime contribution limits affect plans established prior to 1997? For example, what will the limit be on a plan entered into in 1981?

Reply

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.

Question 4

The portion of an EAP that is derived from Canada Education Savings Grants ("CESGs") is calculated as the ratio of CESGs paid into the plan to "total investment earnings held in the plan". For this purpose what is the definition of the term to "total investment earnings held in the plan"?

Reply

CESG Regulations were published in the Canada Gazette Part 1 on September 26, 1998. Section 9 of those regulations provide as follow:

"9(1) Subject to subsections (2) and (3) and for the purposes of these Regulations, the portion of an EAP made at any time to a beneficiary under a RESP that is attributable to CES grants is the lesser of

(a) the amount determined by the formula

			A x B/(C - D)

where

A is the amount of the EAP,
B is the balance in the grant account of the RESP immediately before that time,
C is the fair market value of the property held in connection with the RESP, determined immediately before that time or at an earlier time that is agreed to in the CES grant agreement that applies to the RESP, and
D is the total of all contributions made to the RESP before that time that have not been withdrawn; and

(b) the amount, if any, by which $7,200 exceeds the total of all amounts determined under paragraph (a) in respect of an EAP previously made under the RESP to the beneficiary.

(2) Where in applying the formula set out in paragraph 1(a), the value of C is less than the total of the values of B and D, the result of that formula shall be considered to be the lesser of the value of A and the value of B.

(3) The portion of an EAP made to a beneficiary under a RESP that is attributable to CES grants is nil where the beneficiary

(a) is not resident in Canada at the time of the payment of the EAP; or

(b) became a beneficiary under the RESP after attaining 21 years of age, unless the beneficiary had been a beneficiary before attaining 21 years of age under another RESP that allows more than one beneficiary under the RESP at any one time."

Questions related to the CES grant program should be directed to the administrators of this program, Human Resources Canada at 1-888-276-3624.

Question 5

Can new beneficiaries be added to family plans at any time provided they are related by blood or adoption to the subscriber? Are there any other restrictions regarding changes or additions to beneficiaries?

Reply

As noted in our reply to question 1 (e), new paragraph 146.1(2)(j)(iii) will prevent individuals from becoming members of a family plan at any time if they are 21 years of age or older and they were not immediately before that time beneficiaries of another family plan. There are no other provisions that specifically restrict changes or additions of beneficiaries to a family RESP beyond those noted in the question. However, the provisions of subsection 204.9(4) should be considered if a new beneficiary replaces an existing beneficiary.

Question 6

What is the effect of a partial transfer of an RESP to another RESP with a common beneficiary, to an RESP with a related beneficiary or to a plan with an unrelated beneficiary?

Reply

The Department of Finance provided Explanatory Notes relating to amendments to RESPs and commented on transfers of property from one RESP to another. At page 153 of those notes the Department of Finance states:

"In most situations, a transfer from one RESP to another will not have any adverse consequences. Transfers can be made without any resulting taxes or penalties where there is a common beneficiary under the transferor and transferee plan. In addition this rule will be extended to cases where a beneficiary under the transferor plan is a sibling of a beneficiary under the transferee plan, provided that the beneficiary under the transferee plan is under 21 years of age.

In situations not described above, transfers can result in penalty tax because the RESP contribution history in respect of each beneficiary under a transferor plan will, in effect, be assumed by each beneficiary under the transferee plan. As a consequence, each contribution that was made into the transferor plan is treated on a retroactive basis as also having been made into the transferee plan.

Similar rules will also apply where one beneficiary replaces another beneficiary under the same plan."

New subsection 146.1(7.1) also provide rules for the inclusion of amounts received on the transfer of certain rights under a plan. For example, this provision would apply if a subscriber was paid to change the beneficiary under a plan. The consequences of any such transfer are specific to the circumstances under which they arise and a general answer cannot be provided within the scope of this letter. However we are prepared to address specific situations should you wish to submit them separately.

Question 7

What kind of information does Revenue Canada need regarding RESP transactions? How often should it be sent, and in what format?

Reply

Information required by Revenue Canada includes information/documents needed to approve a specimen plan as explained in Information Circular 93-3 and annual listings containing prescribed information (subscriber(s)' and beneficiar(ies)' names, addresses, beneficiar(ies)' SIN, contract numbers and type of contract etc.) concerning contracts sold during the year. (Please note that provision of the subscriber(s)' SIN is also expected to become a registration requirement).

Information concerning regular transactions will also have to be provided to Human Resources Development Canada (HRDC) who will be acting as agent for Revenue Canada and will have to be submitted in a format established by HRDC.

Any amendments to a specimen plan, declaration of trust, subscriber's application form or prospectus must be sent to Revenue Canada as well as information concerning the termination of specimen plans. If specimen plans provide for accumulated income payments ("AIPs"), form T1171, Tax Withholding Waiver on Accumulated Income Payments from RESPs will be required if the subscriber is directly transferring all or a portion of an AIP to an RRSP and wishes to have the amount of tax withheld at source reduced. Also form T1172, Tax on Accumulated Income Payments from RESPs for 1998 will have to be filled out by subscribers. You must report AIPs and EAPs on T4A income slips.

Question 8

What are the provisions for withholding on AIPs when they are paid to someone other than a subscriber, a subscriber's spouse or a studying beneficiary?

Reply

The withholding requirements on AIPs are not dependent on who the recipient is except where the amount is transferred to an RRSP as discussed in our reply to question 7 above. Amendments to subsection 153(1) of the Act applicable after 1997 now require withholding on all payments made out of an RESP. Enclosed with this reply are copies of documents on withholding that were recently sent by the Department to a number of RESP promoters.

Question 9

Can a subscriber be a beneficiary under a family plan?

Reply

No. A subscriber cannot be connected to himself or herself by blood relationship as required under subparagraph 146.1(2)(j)(i).

Question 10

With respect to using an RESP as collateral, can only the contributions be assigned or can the entire plan including income and grants be assigned?

Reply

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 11

What kind of significant clerical changes should be reported to Revenue Canada, in what form and how often?

Please refer to our reply to Question 7 above. Any changes to the specimen plan, declaration of trust, subscribers application form or prospectus as well as any splitting of contracts will have to be submitted as they become effective.

Question 12

What are the transfer rules for individual and family plans regarding subscribers and beneficiaries? Can individual plans be transferred to family plans or vice versa?

Reply

Please refer to our above replies concerning transfers of plans and changes to beneficiaries.

Yours truly,

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