US Citizens Contributing to RESP’s

A reader recently wrote in asking if it was possible for a US citizen to contribute to an RESP and is a US citizen can be the beneficiary of a trust and how to use RRSPs.  What follows is my response:

Response

If I understand correctly, you have two children one is a US citizen and one is a Canadian citizen and you would like to know if you can use an RESP for education funding.  You have also asked if the RESP funds could be used for US schools.

In the second part of your question, you have some funds you would like to invest and have a desire to lower your overall tax bill and would like some information on RRSPs.

I’ll address these as follows:

RESP’s

The RESP has a subscriber who contributes to the plan and the beneficiary (i.e. the child) who is to receive the funds for post secondary education. There is no need for the subscriber of the plan to be a resident of Canada but the beneficiary or beneficiaries must be residents when the contributions are made in order to qualify for the CESG grant.

In short anyone can subscribe regardless of their residency and anyone can be a beneficiary, but to receive the CESG, the beneficiary must be a resident of Canada at the time the contributions are made.

In your case, if you are a resident of Canada chances are that your children are as well if they live with you and there is really no issue with establishing a plan.  If your children are residents of another country, you should still be able to establish the plan but will not be eligible for the CESG.

With respect to use of the funds outside of Canada, there should be no issue if the program qualifies as post secondary and is not less than 13 weeks.

Note that Canada and the US tax based on residency. If you are in Canada for 183 days or more, you are a resident.  The US rules are more complex but suffice to say it is possible to be a resident for tax purposes in both countries.  Also, be aware that US citizens are required to file US tax returns (I am not certain if there are age limits).

Further you should be aware that the RESP is a Trust and would probably qualify as a foreign trust under US tax law.  You would be required to report this to the IRS based on the citizenship of the beneficiary.

Finally, the RESP will not be taxed in Canada but this does not mean that is will not be taxed under US laws. Thus I would suggest you meet with an accountant in Canada with cross border experience before establishing an RESP.

RRSP’s & Investments

If you have funds to invest, you can open a brokerage account and are free to invest in stocks, bonds, or mutual funds.  A broker can help you determine your objectives, risk profile, and tax concerns and make appropriate investment recommendations.  Just be aware that if you are a US citizen and you purchase mutual funds that are organized as a trust you may have some reporting requirements similar to what I’ve mentioned above and should discuss the implication of mutual funds before investing.

In terms of RRSP’s, if you had earned income in the prior year you can contribute to an RRSP. The contributions are deducted from taxable income when made and added to taxable income if portions are withdrawn. They are similar to an US IRA. Once the funds are inside the RRSP, you can invest in anything you like but consult an investment advisor.