Are RESPs Trusts Under US Tax Law?

Jan 28, 2016

This week’s question comes from Amy from Canada. “I have heard that Canadian RESPs (Registered Education Savings Plans) may be considered trusts for US tax purposes. Is that true? If so, what are the implications of that?”

Is RESP a Trust?

Here is the regulation defining operating trusts (the US defines 2 other types of trusts “business trusts” and “investment trust” but RESPs wouldn’t fall into either category). The regulations 301.7701-4 defining operating trusts specify following:

  • Generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees’ responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit”

Let’s digest it. We need to have somebody (a “trustee”) in charge of managing the assets (responsible “for the protection and conservation of property”) for beneficiaries who cannot do it themselves.

No matter how commonplace RESPs are, we might well have met this criterion for RESPs. For example, we have:

  • A grantor (somebody who contributed the assets): The parents
  • A trustee: Either the parents or the bank
  • Beneficiaries: The children who will only be able to use the assets to finance their education.

It is clear that the beneficiaries and the trustee are two different people. Also, the beneficiaries can not access the assets. This would constitute an operating trust.

Provided that it is a Trust, What Would be the Implications?

If the parents are US persons, they should file form 3520. Also, to the extent, the trustee (the bank) did not file a form 3520-A. The parents as US persons would also have to file a “substitute” form 3520-A. It would increase the compliance cost. Hence if only one parent is a US person, it would be beneficial to have a non-US parent sponsoring the RESP.

Also, no provision of the Internal Revenue Code would cause revenue earned within the RESP to not be taxable. As such, it would be included in taxable income. Oh, and it’s all while running the risk of not being able to offset it with foreign tax credits since such income is not taxable in Canada.


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