A decade ago, an article published in the Globe & Mail compared the costs of education and the housing market to the 1980s to answer the question: Do young adults have it harder today? The conclusion: “Back in my day, economically speaking, life was easier.” One could argue that the same can be said in 2023. The chart (right) shows just how these costs have continued to rise over the decades.
It is, therefore, not surprising that many grandparents wish to help younger generations fund the cost of education. When it comes to the Registered Education Savings Plan (RESP), it is possible for grandparents to set up (as “subscriber”) the RESP for the benefit of grandchildren (as “beneficiary”). However, caution should be taken as there may be complications, such as in the following three situations:
1. The child does not pursue post-secondary education. While it may be possible to transfer up to $50,000 of RESP accumulated income payments to a subscriber’s RRSP, grandparents may be beyond the age of holding the RRSP. In this case, there are likely to be tax implications.
2. The grandparent retires outside of Canada. There may be tax implications for the subscriber, depending on the tax rules of the retiree’s country. For example, in the U.S., the U.S. Internal Revenue Service doesn’t recognize the tax-deferred status of the RESP, so it would be considered a foreign trust. While the RESP would continue to be tax exempt in Canada, annual income earned in the RESP, plus annual grants received, would be taxable to the subscriber on a U.S. tax return.
3. The RESP subscriber passes away. Many incorrectly assume that, upon death, RESPs are treated similarly to RRSPs and pass outside the estate to the beneficiary; however, this isn’t the case. Generally, if there is no surviving joint subscriber or alternative plan in place, RESP assets would become part of the deceased subscriber’s estate (i.e., the plan would collapse, with tax implications for income and grants received) and the value will belong to the beneficiaries of the estate. The estate beneficiaries may not be the same as the RESP beneficiary.
Given the potential complications, if a grandparent feels comfortable with the parents’ discretion, it may be beneficial to consider gifting funds to parents to contribute to a child’s RESP. There may be other options, such as setting up a family plan with multiple beneficiaries (siblings, cousins), so if one or more beneficiaries decide not to pursue a qualifying education, the plan’s assets can be used by others. Providing explicit instructions within a will can help to pass along the RESP according to the subscriber’s wishes in the event of death.