Continuing RESPs Beyond the Death of the Subscriber

Funds invested in an RESP remain the property of the subscriber (the person who established the RESP) until payments are made to or for the benefit of a beneficiary. Thus, on the death of the sole or last subscriber, the RESP will form part of his or her estate. Unless specific provision has been made in the will, the RESP will fall into the residue of the estate to be dealt with in accordance with the residue provisions of the will. In many cases, this will result in the RESP being liquidated and distributed to the residuary beneficiaries. A better tax result can often be obtained if the RESP is instead continued beyond the subscriber's death.

Subsection 146.1(7) contemplates that the beneficiary of an RESP must include in his or her income educational assistance payments (EAPs) made out of the RESP to or for the beneficiary. Section 146.1 defines an EAP as any amount, other than a refund of payments, paid out of an education savings plan to or for an individual to assist the individual to further the individual's education at a post-secondary level. Subsection 146.1(7.1) contemplates other income inclusions, including accumulated income payments, and covers the majority of RESP payments other than EAPs.

The value of an RESP is twofold: (1) it allows EAPs to be taxed in the hands of the beneficiary, who in many cases is taxed at a lower marginal rate than the subscriber; and (2) the beneficiary may be entitled to grants under the Canada Education Savings Act or other provincially designated programs for the purposes of EAPs.

The definition of "subscriber" in section 146.1 includes any other person who acquires the individual's rights as a subscriber under the plan or who makes contributions into the plan in respect of a beneficiary, including the estate of the subscriber. Accordingly, a will can allow the executor or a trustee or other person to acquire the rights of the subscriber under an RESP, or to contribute to the plan on behalf of a beneficiary, in order to continue the plan beyond the death of the testator for the benefit of the beneficiaries of the plan. There is no need to immediately liquidate the RESP and create the associated tax consequences; its continuation, for example, could allow taxation to be deferred and future distributions to qualify as EAPs and be taxed at the RESP beneficiary's low marginal tax rate. Of course, consideration should be given to the specific terms of the RESP (the contract between the subscriber and the promoter) in order to determine whether and how the RESP permits the designation of a successor subscriber, and to determine who is allowed to be a successor or an additional subscriber under the contract.

The RESP is an asset of the subscriber, and the subscriber is therefore entitled to withdraw funds from the RESP. If an individual is named to receive the rights of the subscriber under a plan, the wording should clearly say whether that individual is to hold those rights in trust for the benefit of the beneficiaries of the plan. If an RESP is the subject matter of a trust, the testator should consider what is to be done with any amounts remaining in the plan if it is not exhausted by EAPs.

Finally, the RESP provision of the will should be drafted with regard to the testator's overall estate plan. For example, the nature of RESPs is that some or all of the funds invested might not be paid out by way of EAPs. This poses difficulties in circumstances where the overall intention is to benefit certain beneficiaries (for example, children or grandchildren) equally, since not all beneficiaries may be entitled to EAPs—for example, a beneficiary who does not attend a qualifying education program (as defined in section 146.1).

Cole R. Southall
Fillmore Riley LLP, Winnipeg

Canadian Tax Focus
Volume 8, Number 1, February 2018
©2018, Canadian Tax Foundation