How has the cost of an education grown over time? A look back at the historical cost of undergraduate tuition provides some insight. For those who went to university in the 70s and 80s, tuition was largely in the hundreds of dollars. Today, average undergraduate tuition has exceeded $7,000, and once room and board, as well as other supplies, are factored in, the cost can be upwards of $30,000 per year.
It is, therefore, not surprising that many grandparents are now considering supporting the cost of a grandchild’s education through the use of the Registered Education Savings Plan (RESP). The RESP offers many benefits: tax-deferred growth within the plan, earnings taxed at the child’s tax rate when eventually withdrawn and, of course, the Canada Education Savings Grant (CESG) — funds paid into the plan by the federal government, potentially adding an additional $7,200 per qualified beneficiary.
While grandparents can open the RESP as the “subscriber” for the benefit of a grandchild, there may be unintended consequences in certain situations. Here are three, along with some potential mitigating alternatives:
What if the child opts not to pursue higher education?
If the RESP will not be used for qualifying educational purposes, it may be possible to transfer up to $50,000 of the RESP’s accumulated income to the subscriber’s RRSP, if contribution room is available. However, grandparents over 71 years old will not hold the RRSP and there are likely to be tax implications. Alternative: One approach might involve grandparents setting up a family plan with multiple beneficiaries (such as the grandchild’s siblings or cousins). If one beneficiary chooses not to pursue a qualifying education, the plan’s funds can benefit other beneficiaries. Another alternative would be for the parents to set up the RESP and have grandparents gift funds as contributions.
What if you relocate from Canada?
If the RESP subscriber decides to retire outside of Canada, there may be tax repercussions. For instance, in the U.S., the IRS doesn’t recognize the RESP’s tax-deferred status and views it as a foreign trust. Consequently, the annual income and grants earned within the RESP would be subject to U.S. taxation for the subscriber. Alternative: Before leaving Canada, transferring the RESP to a new one with a Canadian-resident subscriber but the same beneficiary may be a prudent move.
What occurs in the event of death?
Many incorrectly assume that, upon death, RESPs are treated in the same manner as RRSPs and bypass the subscriber’s estate. However, generally, if there’s no surviving joint subscriber or alternate arrangement, the RESP assets become part of the deceased subscriber’s estate. This means that the plan will be collapsed, triggering tax implications for received income and grants, and the value will become part of the estate property, to be distributed to the estate’s beneficiaries. These beneficiaries may not be the same as the RESP beneficiary. Alternative: To ensure the RESP’s original intent, instructions for the RESP can be directed within the last will, such as naming a replacement subscriber.