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Q. I opened a RESP account while I was living in Canada, as a Canadian citizen. A few years back, we moved to the U.S., where my kids are going to college and university. I still have an active RESP account and make regular monthly contributions.
We file our tax returns in the U.S. only, since we declared ourselves as non-resident Canadian citizens in 2014.
Please let me know if we are still entitled to receive the Canadian government’s grant on RESP contributions, and what is the procedure to withdraw the funds.
A. When you become a non-resident of Canada, you can generally continue to maintain Canadian registered investment accounts like a Registered Education Savings Plan (RESP). You may not be able to buy new mutual funds as a non-resident, but can continue to hold existing mutual funds, sell those mutual funds, or buy other investments, like stocks, bonds and exchange-traded funds (ETFs).
There are a couple issues to be aware of in your case, Sohail. A U.S. taxpayer, whether a U.S. citizen in Canada, or a U.S. resident like you, may have U.S. tax implications from a Canadian RESP. The Internal Revenue Service (IRS) does not recognize the tax-deferred status of a RESP, so the income will be taxable on your U.S. tax return.
If you own Canadian mutual funds or ETFs in your RESP, these may be considered Passive Foreign Investment Corporations (PFICs). PFICs have additional tax reporting requirements for a U.S. taxpayer as well.
U.S. citizens residing in Canada will have to report any Canada Education Savings Grants (CESGs) or similar government grants as income on their U.S. tax return. However, non-residents like you, Sohail, are not eligible to receive grants for their ongoing contributions. The residency requirement is based on the residency of the beneficiaries of the RESP, not the subscriber, and since your children live with you in the U.S., the RESP should not be eligible for government grants.
In my experience, it is not uncommon for non-residents to fail to update their residency status with their Canadian financial institution. This could lead to CESG grants continuing to be paid on contributions, or improper tax withholding for other non-RESP accounts.