Q: We are moving overseas to New Zealand. I’m wondering what the implications are for our son’s RESP if we become non-residents? Can we continue to contribute? Will we lose what benefits are already in the account?
A: A subscriber is the person who opens and manages a Registered Education Savings Plan (RESP). They can be a non-resident, contributions can still be made, and grants received, if the beneficiary is still a resident. That may not be the case here, Cara, assuming your son is moving with you.
The residency of a beneficiary is more important for a RESP*. When a beneficiary becomes a non-resident, it does not impact the existing government grants like the Canada Education Savings Grant (CESG) or other means-tested federal or provincial grants already in the account. It does negate the eligibility for that beneficiary to receive future grants, and contributions cannot be made to a RESP for a non-resident beneficiary.
So, your existing RESP account can be maintained while you’re a non-resident, Cara. It will remain tax-sheltered in Canada while you have the account. However, New Zealand, and many other countries, tax residents on their worldwide income. New Zealand does have transitional resident rules exempting foreign source income from tax for 48 months after becoming resident and your family may qualify. It is important to get proper tax advice in New Zealand, as your RESP income and gains may be taxable to you or to your son there, as well as many other foreign countries.
If you take withdrawals from the RESP while your son is a non-resident of Canada, any government grants are repaid directly to the government. Assuming your son is attending an eligible post-secondary institution at that time, which can include a foreign college, university, or similar establishment, your principal withdrawals (original contributions) are withdrawn tax-free. The income and growth over and above your principal are subject to Canadian withholding tax of 15% if your son is a resident of New Zealand. If he’s a resident of another country that doesn’t have a tax treaty with Canada, the withholding tax may be 25%.
Your son may or may not receive credit for tax withheld in Canada on a foreign tax return depending where he resides at that time, Cara. New Zealand allows residents to claim foreign tax credits, but there may be a mismatch of what is considered income for Canadian withholding tax purposes and what is considered income for New Zealand tax purposes. You will need local tax advice.
If your son returns to Canada, even if you don’t, that changes things. The RESP withdrawals won’t trigger repayment of the CESG or other grants. The CESG, income, and gains exceeding your principal contributions will be taxable to your son upon taking an eligible withdrawal, but like most students, he will likely pay little to no tax on the income.
It is important to note that a child can be considered a resident of Canada, even though they are studying at a foreign school. This could be the case, Cara, if your family returned to Canada, but your son studied at a foreign university, returning home each summer.
As a non-resident of Canada, you may find that some Canadian financial institutions will not let you maintain your Canadian investment accounts. If you own Canadian mutual funds in the RESP, you may be allowed to continue to hold them, but not to buy or switch into new ones. So, as a non-resident, you may be limited in the management of your investments or even where you can have accounts.
In summary, Cara, leaving Canada does not necessarily negate the benefit of a RESP account. It means your contributions must stop if the beneficiary is a non-resident and may result in repayment of grants or withholding tax if withdrawals are taken while a beneficiary is non-resident. Particularly if your beneficiary will return to Canada for their education, a RESP will function in much the same way it was originally intended. You may just need to look for other ways to save for a child’s education while they are non-residents.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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