RESP Withdrawals Across the Border: The EAP to a US Student, the Grant Repayment, and the Foreign Trust the IRS Sees

Short version: RESPs for U.S. Citizens: The Cross-Border Problem

An RESP pays for post-secondary education with three components: the subscriber's contributions (returned tax-free), the government grants (the CESG and provincial grants), and the plan's earnings. When the beneficiary studies at a US university while remaining a Canadian resident, the plan works normally and the EAP is taxable to the student in Canada. When the beneficiary has become a US resident, the grants must be repaid, the EAP is subject to non-resident withholding, and the US treats the earnings as income to the student. When the subscriber or beneficiary is a US person, the IRS treats the RESP as a foreign trust with its own reporting. Here is each case.

Key takeaways

• EAP to a Canadian-resident beneficiary at a US school: the RESP can pay EAPs for a qualifying program at a foreign university (a full-time program of at least three consecutive weeks at a university, or 13 weeks at other institutions). The EAP (grants plus earnings) is taxable to the student in Canada at the student's low rate; contributions are returned tax-free.
• Beneficiary who is a non-resident of Canada: the CESG and Canada Learning Bond must be repaid to the government (grants are not available to non-resident beneficiaries); EAPs of the earnings can still be paid but are subject to 25% Part XIII withholding as income to a non-resident, reducible under the treaty to 15% if characterized as pension-like periodic payments (the CRA's practice varies; assume 25%).
• US-person subscriber: the RESP is a foreign grantor trust; Forms 3520 and 3520-A annually; the plan's earnings are taxable to the subscriber each year on the 1040; the CESG is taxable income to the subscriber when received.
• US-person beneficiary: EAPs are taxable to the beneficiary in the US to the extent of earnings (the grant portion is also income); distributions from a foreign trust are reported on Form 3520; a foreign tax credit applies to any Canadian withholding.
• Planning: the Canadian parent should be the subscriber where one parent is a US person; a beneficiary who will move to the US should draw down the RESP while still a Canadian resident; the plan should be collapsed before the beneficiary becomes a US person if the balance is small.

The Canadian rules

An EAP is a payment of the plan's accumulated income and grants to a beneficiary enrolled in a qualifying educational program. It is included in the beneficiary's income (typically at a low rate, often below the basic personal amount). Contributions are returned to the subscriber or paid to the beneficiary tax-free. EAPs are limited to $8,000 in the first 13 weeks of a full-time program ($4,000 for part-time), then unlimited.

A foreign university qualifies if the program is full-time and at least three consecutive weeks (or 13 weeks for a non-university institution). A Canadian student at a US university, still resident in Canada (living in residence, returning home, maintaining ties), receives EAPs normally.

The CESG (20% of contributions up to $500 a year, $7,200 lifetime) requires the beneficiary to be a Canadian resident when contributions are made; if the beneficiary becomes a non-resident, no further grants are paid, and grants already in the plan must be repaid when an EAP is paid to a non-resident beneficiary or when the plan is collapsed. The plan can continue to hold the grants until the beneficiary returns or the plan is wound up.

EAPs paid to a non-resident beneficiary are subject to Part XIII withholding at 25%.

The US rules

Subscriber. For US purposes, the RESP is a trust settled by the subscriber for the benefit of the child, with the subscriber retaining control (the right to withdraw contributions, change beneficiaries, collapse the plan). The IRS treats it as a foreign grantor trust: the subscriber reports the plan's income annually on the 1040 as their own (no deferral, no treaty protection), files Form 3520 annually to report the trust and any transfers and distributions, and files Form 3520-A on the trust's behalf. The CESG is income to the subscriber when credited. Penalties for missing the forms are 5% per month of the trust's value, up to 25%, and 35% of contributions or distributions.

Where one parent is a US person and the other is not, the Canadian parent should be the sole subscriber. Where both are US persons, the compliance cost usually exceeds the grant; a taxable account or a US 529 plan (which Canada taxes as an ordinary account) is considered.

Beneficiary. A US-person beneficiary (a child who is a US citizen through a parent, or who has moved to the US) receiving an EAP has income: the earnings and grant portion is taxable in the US as ordinary income, and if the plan is a foreign trust the distribution is reported on Form 3520 by the beneficiary. The return of contributions is not income. Any Canadian withholding is a foreign tax credit. The AOTC or LLC may be available for the tuition paid.

The cross-border cases

Canadian family, child at a US university. Child remains a Canadian resident; EAPs taxable to the child in Canada; no US reporting (child is a non-resident alien with no US-source income from the RESP). The child files a Canadian T1 reporting the EAP and claims the tuition credit for the US school on Form TL11A.

Canadian family moves to the US, child is 15. Child becomes a non-resident; no further CESG; grants remain in the plan for now. When the child attends university (in the US or Canada) as a non-resident, EAPs are subject to 25% withholding and the grants must be repaid. Better: contribute the maximum and draw down or collapse the plan before the move, or if the child will attend a Canadian university and re-establish Canadian residence, leave the plan intact.

US-citizen parent in Canada, Canadian spouse. The Canadian spouse subscribes; the US parent has no reporting. If the child is also a US citizen (through the parent), EAPs are US-taxable to the child on the earnings and grant portion, and the child files Form 3520 for the distribution; the child's low income usually means little US tax.

Both parents US persons, in Canada. The RESP is a foreign grantor trust to the subscriber with annual Forms 3520 and 3520-A; the subscriber pays US tax on the plan's income annually and on the CESG. The plan is usually not worth it.

Worked example

A Toronto family with a $60,000 RESP ($36,000 contributions, $7,200 CESG, $16,800 earnings) moves to Florida when their daughter is 17; she will attend a Florida university.

• On departure. Daughter becomes a non-resident; no further CESG. If the plan continues, the $7,200 CESG must be repaid when an EAP is paid to her as a non-resident, and EAPs of the $16,800 earnings face 25% withholding ($4,200); she reports the earnings on her US return with a credit for the withholding.
• Better path. Before departure, with the daughter enrolled in a qualifying program (a Canadian university or a US one that qualifies) while still a Canadian resident, pay EAPs of the earnings and grants to her at her low Canadian rate; then withdraw the contributions tax-free. Or, if she is not yet enrolled, collapse the plan before departure: contributions returned tax-free, CESG repaid, earnings taxed to the subscriber as an accumulated income payment (at marginal rate plus 20%) or rolled to the subscriber's RRSP up to $50,000 if room exists.
• US reporting. After the move, if the plan continues, the subscriber (now a US person) has a foreign grantor trust: Forms 3520 and 3520-A; the parents choose to collapse it before the move to avoid this.

Official sources

"The student includes the EAPs as income on their income tax and benefit return for the year the student receives them." There is a limit of "$8,000, for the first 13 consecutive weeks" of a full-time program. — Canada Revenue Agency, Payments from an RESP, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps/payments-resp.html

"U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report: Certain transactions with foreign trusts. Ownership of foreign trusts under the rules of sections 671 through 679. Receipt of certain large gifts or bequests from certain foreign persons." — Internal Revenue Service, About Form 3520, https://www.irs.gov/forms-pubs/about-form-3520

Practitioner note

The RESP is the account families forget in the move, and it has the worst combination of consequences: grant repayment, non-resident withholding, and foreign trust reporting, on an account that was supposed to be simple. Collapse it, or pay the EAPs while the student is still Canadian, before the departure date. And if one parent is American, the other one signs the RESP.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the RESP planning before a move, the EAP and withholding analysis for non-resident beneficiaries, and the Form 3520 reporting where a US person is the subscriber or beneficiary. See cross-border pricing or book a call.