The Good and Bad about RESPs for United States citizens living in Canada

Boy completing his homeworkWhen it comes to saving for your child’s education in Canada there is no better place to start than a Registered Education Savings Plan (RESP). No other plan provides an instant 20 per cent growth on your contributions through grants. But, for American’s living in Canada, there are major complications that can quickly make RESPs more of a curse than a blessing.

These complications exist for any parents who are United States citizens. You may have never lived in the United States, but your dual citizenship requires you to file paperwork with the IRS every year.

If you are considering an RESP for your child and you are a U.S. citizen, it is highly recommended that you speak with a tax specialist and a financial advisor that focuses on helping Americans living in Canada. If you speak to a tax specialist or financial advisor and they advise that there are no complications in setting up an RESP for American parents, look elsewhere. In the end, you may decide an RESP is right for you, but you need to do so after seeking the proper advice and assistance.

Below are some key benefits and complications for American citizens looking to contribute to an RESP.

Good (benefits in Canada)

Bad (difficulties in the U.S.)

Child (beneficiary) receives money (taxable at child’s tax bracket) Parent still owns property (taxable at parents tax bracket)
Tax deferred (no tax paid until removed from RESP) Pay tax every year on income (creates a double taxation situation)
20 per cent grant up to $500 per year (can be used for post-secondary school around world) Any grant received from the Canadian government is taxable as income every year in U.S.
If child doesn’t go to post-secondary the money can be used for another child, contributed to an RRSP, donated or withdrawn (tax consequences)—the grant money will be returned to the Canadian government If your child does not pursue post-secondary then tax has been paid all along (including on the grant money)—the grant money will need to be returned to the Canadian government
Once set up there are no additional forms required until redeeming the money for school Yearly forms 3520 and 3520a are required by the IRS (because it is considered a Grantor Trust)
  • J8

    Hi — I’m wondering… what could be the disadvantages of having an RESP if only the child is a US citizen; born in the US but a Canadian resident with Canadian parents? Thank you.

    • Dave Field

      That is a very interesting scenario. The reasons RESPs do not work for parents who are US citizens is that the money contributed by parents and the Canadian government is considered a Grantor Trust and gains are still taxable to the parents when they file there taxes every year (not tax sheltered like in Canada). In this case, with a child who is a US citizen but a Canadian resident with Canadian parents (that are not also US citizens that file taxes with the IRS), I don’t see any disadvantage to opening an RESP for the child. The parents own the RESP and the child is the beneficiary. The parents and child will have all the benefits of the RESP and have the option to use the savings for education in Canada, the United States or around the world.