US Expats and RESP Taxation: What You Need to Know

February 14, 2025
US Expats and RESP Taxation: What You Need to Know

Introduction

Registered Education Savings Plans (RESPs) are widely used in Canada to help families save for post-secondary education. While these accounts provide tax advantages under Canadian law, they present a complex set of tax implications for U.S. citizens and residents. Due to the differences in tax regulations between the U.S. and Canada, U.S. expats with RESPs must navigate reporting obligations, annual taxation on account growth, and potential double taxation.

 

This guide outlines how the IRS treats RESPs, the impact of Revenue Procedure 2020-17, and key reporting requirements to help U.S. expats maintain compliance and minimize tax liabilities.

 

Understanding Registered Education Savings Plans (RESPs)

An RESP is a tax-advantaged savings account in Canada designed for post-secondary education funding. While contributions are not tax-deductible in Canada, investment income and government grants grow tax-free until withdrawal. At that point, withdrawals are taxed in the hands of the student beneficiary at their lower income tax rate.

For U.S. tax purposes, however, RESPs are classified as foreign grantor trusts, with the U.S. parent considered the owner. This means:

  • The income earned in an RESP is subject to U.S. taxation annually.
  • Reporting obligations such as FBAR and FATCA apply.
  • Forms 3520 and 3520-A were previously required but are now waived under Revenue Procedure 2020-17.

 

How Are RESPs Taxed in the U.S.?

While Canada provides tax-deferred growth for RESPs, the IRS does not recognize this deferral. Instead, the U.S. taxes RESP income in the year it is earned, even if funds remain within the account. Here’s how RESP taxation works:

  • Annual Taxation: Interest, dividends, and capital gains inside the RESP must be reported annually on the U.S. tax return.
  • Grantor Trust Treatment: The U.S. parent or contributor is treated as the owner for tax purposes, making them responsible for reporting and taxation.
  • Passive Foreign Investment Company (PFIC) Rules: If the RESP holds foreign mutual funds or ETFs, the IRS classifies them as PFICs, triggering additional reporting on Form 8621 and potentially punitive tax treatment.

 

The Impact of Revenue Procedure 2020-17

The introduction of Revenue Procedure 2020-17 in 2020 changed how the IRS treats certain tax-favored foreign savings accounts, including RESPs. Under this ruling:

  • Form 3520 and 3520-A are no longer required for RESPs that meet the definition of tax-favored foreign non-retirement savings trusts.
  • RESPs still remain subject to annual U.S. taxation on income and must comply with FBAR and FATCA reporting.
  • The relief does not affect how RESP income is taxed but simplifies reporting obligations.

 

U.S. Reporting Obligations for RESPs

Despite the waiver of Form 3520 and 3520-A, U.S. expats must still report RESPs under other IRS regulations:

  • FATCA Compliance (Form 8938):
    • If the total value of foreign financial assets exceeds $200,000 for U.S. citizens abroad ($50,000 for those in the U.S.), RESPs must be reported.
  • FBAR Filing (FinCEN Form 114):
    • If the RESP, combined with other foreign accounts, exceeds $10,000 at any time during the tax year, it must be reported under FBAR rules.
  • Income Tax Reporting:
    • RESP earnings (interest, dividends, capital gains) must be included on Form 1040 and taxed accordingly.

 

How to Avoid Double Taxation on RESP Withdrawals

Since RESP withdrawals are taxable in Canada and the U.S., double taxation is a concern. To mitigate this:

  • Foreign Tax Credit (Form 1116):
    • U.S. taxpayers can claim a foreign tax credit for Canadian taxes paid on RESP withdrawals, reducing U.S. tax liability.
  • Tax Treaty Provisions:
    • While the U.S.-Canada Tax Treaty does not directly address RESPs, its general provisions help prevent double taxation.
  • Strategic Withdrawals:
    • Planning withdrawals in years of lower taxable income can help minimize tax exposure.

 

Should U.S. Expats Contribute to an RESP?

Given the complexities of U.S. tax treatment, U.S. expats in Canada should carefully assess whether an RESP is the right savings vehicle. Consider:

  • Advantages: Government grants, tax-deferred growth in Canada, and lower taxation for the student upon withdrawal.
  • Disadvantages: Annual U.S. taxation, PFIC implications, and complex reporting requirements.

Alternative education savings options like U.S. 529 plans may provide simpler tax benefits for U.S. expats without the complications of RESP taxation.

 

Conclusion

RESPs offer valuable benefits under Canadian law but require careful tax planning for U.S. expats. Understanding the IRS treatment of these accounts, complying with reporting requirements, and utilizing foreign tax credits can help minimize tax burdens while ensuring compliance with both U.S. and Canadian tax laws.

 

For expert guidance on RESP taxation and cross-border tax planning, consult with a tax professional specializing in U.S. expat taxes.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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