Reporting the EAP portion of RESPs in the 1040

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Lrod373
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Joined: Tue Jan 16, 2018 4:37 pm

Reporting the EAP portion of RESPs in the 1040

Post by Lrod373 » Fri Sep 11, 2020 7:43 pm

I have an RESP in Canada for my children education. This is the first year that I take some funds out. Scotiabank told me that the amount is part of the Corpus, that is the contribution after tax that we put it, so, there is NO tax or NR4 to be issued. However, once I start withdrawing from the EAP portion, they will withhold 25% and issue a NR4 which a copy is sent to the IRS.

So, the question is, is there any form to attach to the 1040 to avoid double taxation. It must be reported somewhere, but I have no idea where?
Anybody knows? Any clues would be highly appreciated.

Ron.Henderson
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Joined: Sun Jan 06, 2019 2:24 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Ron.Henderson » Sun Sep 13, 2020 11:52 am

Is this one of those situations where the Canadian government has contributed towards your children's education, but the IRS wants to take a cut? So thoughtful of them.

Two thoughts: Is it not the child who pays income tax on the RESP withdrawal, not the parent? This is a good example of when it makes sense to take out the RESP in the name of a non-US parent, if that's possible.

Lrod373
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Joined: Tue Jan 16, 2018 4:37 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Lrod373 » Mon Sep 14, 2020 7:54 am

Not really,
The RESP have 3 main portions for Tax purposes.
1.- Your contributions which were after tax - There is nothing to report here, this is like your savings. No NR4 issued.
2.- Canadian Government Grant - The bank holding the RESP will calculate this portion and will take it. Nothing to report here No NR4
3. - Earned Growth - This is the amount the account grew over the years. When you withdraw funds, the institution will withhold 20% and issue an NR4. THIS IS THE PORTION THAT I AM STRUGGLING WITH.

I thought just to report it as income and file a form 1116 for a tax credit but I am not sure this is the right thing to do, because if you add this as income it will be taxed, right. Effectively being double taxed.

Lrod373
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Joined: Tue Jan 16, 2018 4:37 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Lrod373 » Mon Sep 14, 2020 7:56 am

I realized that I wrongly call the Earned Growth "EAP"...

Ron.Henderson
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Re: Reporting the EAP portion of RESPs in the 1040

Post by Ron.Henderson » Mon Sep 14, 2020 12:49 pm

Again, I believe that any tax paid on the taxable (earned growth) portion is paid by the student, not by the contributor.

At least that's how it works in this family.

Ron.Henderson
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Re: Reporting the EAP portion of RESPs in the 1040

Post by Ron.Henderson » Mon Sep 14, 2020 12:51 pm

There was also no withholding in our case. If any tax is due, it's paid by the student the following year. The student in question lives and studies in Canada and is not filing US tax returns.

Ron.Henderson
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Joined: Sun Jan 06, 2019 2:24 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Ron.Henderson » Mon Sep 14, 2020 12:54 pm

Sorry for the multiple posts. Could you clarify one point: the bank's claim that a copy of the NR4 is sent to the IRS. Under what circumstances would that happen? It's certainly not part of the FATCA agreement as I understand it. Furthermore, RESP accounts (like RRSP, RDSP, TFSA and others) are not reported to the US under FATCA - per the terms of the US-Canada agreement, they are exempt from all reporting.

Ron.Henderson
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Joined: Sun Jan 06, 2019 2:24 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Ron.Henderson » Mon Sep 14, 2020 1:06 pm

And again, sorry. You're wrong about the government contribution being taxable, by the way. It is. Without knowing where the student is and which returns they file, it's a bit hard to figure out the tax implications.

Here is a useful summary found on the Interwebs:

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Tax treatment of withdrawals

Now to the question at hand: what is the tax treatment of these withdrawals?

Contributions

Since the contributions do not benefit from a tax deduction (in other words, after-tax dollars were contributed), the contributions can be withdrawn tax free to the subscriber (parent or grandparent of the child or children) or beneficiary (child or children). These are called “refund of contributions”.

Education Assistance Payments (EAP)

Payment of the Canada Education Savings Grant, Canada Learning Bond and accumulated earnings are called Education Assistance Payments (EAP) and are payed to beneficiaries (children). These payments are taxable in the tax return of the beneficiary.

In order to receive an EAP, the recipient must be enrolled in a qualifying educational program, which is an educational program at post-secondary school level, that lasts at least three consecutive weeks, and that requires a student to spend no less than 10 hours per week on courses. The recipient must also be at least 16 years old.

Although the income received by the student is taxable, remember that it is likely that this student has little to no other income to declare while attending school full-time; therefore, these payments will be subject to a low income tax rate.

Lrod373
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Joined: Tue Jan 16, 2018 4:37 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Lrod373 » Mon Sep 14, 2020 3:44 pm

Ron
My children will be studying in the US. So, the money has to be withdrawn under my wife and I name, transfered to the US using our accounts, which is part of the issue. If the children were in Canada, none of this would be an issue.
It was the Bank of Nova Scotia who is holding the RESPs the one who told us about the NR4, which I know for a quite bitter experience is sent to the IRS as well.
It is possible that the Scotia rep gave us wrong info... this is very confusing and very few people really know it in depth.

Ron.Henderson
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Re: Reporting the EAP portion of RESPs in the 1040

Post by Ron.Henderson » Mon Sep 14, 2020 3:50 pm

Not sure why the bank thinks it should be withholding, but if you're all US residents then they're probably going make an expensive mess of the situation. In our case the payment is made directly to the student - a cheque in their name - since it's their income; the parent requests the withdrawal and specifies which percentage should be taxable vs. non-taxable.

Lrod373
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Joined: Tue Jan 16, 2018 4:37 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Lrod373 » Mon Sep 14, 2020 3:51 pm

Ron,
I think your summary was quite clear and thanks a lot for it. I will ask the bank if they can do that... that will make it very clear to everyone.... thanks a lot for that.

Ron.Henderson
Posts: 76
Joined: Sun Jan 06, 2019 2:24 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Ron.Henderson » Mon Sep 14, 2020 4:55 pm

Before you make the withdrawal, discuss with the bank what portion should be taxable. I did not know to do this when our child started university, and made two mistakes: first, taking out the full year's disbursement in December, when only one semester's tuition could be written off for that tax year; second, letting the bank randomly decide to make it 80 percent taxable. As a consequence our child owed some tax the following year, though I was able to claw the money back a year later by doing a better job of timing the payments.

Note that there is a strange rule that limits the initial payment to $5,000, with further money unavailable before December. This only applies in the first year.

If it happened in Canada there would be no withholding. I have no idea how it works for non-residents, or who taxes it in the case of someone going to school in the US. There should be no risk of double taxation, and if things are done properly there should be no tax paid at all because the students income will be low and expenses will be high.

If US tax is paid then it's a situation where, yes, a percentage of the Canadian government's contribution towards educational costs is being donated to the US treasury. Another reason to ignore US taxes, but of course the IRS is not easily avoided if one actually lives in the US.

Lrod373
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Joined: Tue Jan 16, 2018 4:37 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Lrod373 » Mon Sep 14, 2020 6:42 pm

They already told me that our contributions are NOT taxable and are no different than a savings account.
The CGG portion will be taken out by the Bank and returned to the Canadian Governement.
ONLY the growth will be Taxable, I just realized that the main thing is that it is being withdrawn on our name, we transfer to our kids but I don't know how to report that this is not really our money but our kids'

Ron.Henderson
Posts: 76
Joined: Sun Jan 06, 2019 2:24 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Ron.Henderson » Mon Sep 14, 2020 6:51 pm

To your last point, our bank sent the money directly to the kid, and issued tax forms in their name (for the taxable EAP portion only.

You can ask the bank how much from each source to disburse - which percentage from original contribution (non-taxable) and which percentage from EAP (taxable) - each time you make a withdrawal.

Pity the government grant is being returned - I assume that must have something to do with having left Canada?

Lrod373
Posts: 11
Joined: Tue Jan 16, 2018 4:37 pm

Re: Reporting the EAP portion of RESPs in the 1040

Post by Lrod373 » Mon Sep 14, 2020 7:52 pm

Correct, they take it back for NON-Residents...it is not much, so it is not that painful as a 25% withhold.

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