non-resident tax rate on educ savings plan payment

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leggwork
Posts: 5
Joined: Tue Aug 23, 2005 10:51 am

non-resident tax rate on educ savings plan payment

Post by leggwork »

Hello,
It was nine years ago that this board and Mark helped with our move to the US from Canada and I'm glad to see it is still going strong.

We enrolled our kids in an education savings plan with University Scholarships of Canada when we lived in Canada.

My son just received the first payment to him and they withheld 15% tax. To me, this payment is interest on the money that I originally contributed. When I look at the information circulars it shows that interest payments should have only 10% withheld.

Is there something special about the education plans that makes this payment be considered something other than straight interest?

many thanks,
Bruce Leggett
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Payments from RESP are not considered interest, neither in Canada or in US.

For the purposes of the treaty they are considered income distributions from a trust, which is subject to 15% Cdn tax.

This says nothing about your US tax obligations on these monies. Unless you have been declaring a paying tax on a year-over-year basis all along, you likely must now be including some portion of the RESP payout as annuity income, as well as filing foreign trust documents (Form 3520).

<i>nelsona non grata... and non pro</i>
leggwork
Posts: 5
Joined: Tue Aug 23, 2005 10:51 am

Post by leggwork »

thanks Nelson.

This is the first year of payout so I haven't been filing anything other than a report of foreign account to date.

So, on my son's tax return next year do we report this as income but take a credit for the canadian tax already withheld? Or do we have to file a Canadian return to reclaim that tax withheld?

thanks,
bruce
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The 15% tax is his final Cdn tax on this RESP money. It is not top be reported on any Cdn return, and cannot be reduced.

For US, the income is to be included on HIS return, and HE can take the tax credt or deduction if he has any tax owing.

You should be warned that your RESP was never sheltered in the eyes of IRS, so there may be questions as to whay your (or son) did not report the yearly income that it generated. You may have back taxes to pay.

<i>nelsona non grata... and non pro</i>
leggwork
Posts: 5
Joined: Tue Aug 23, 2005 10:51 am

Post by leggwork »

this is the first year that he's received a payout.
Are you saying we should have been paying taxes as the money was accruing? That doesn't seem right.

thanks,
bruce
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

IRS has never recognized RESP as a shelter, just like CRA does not recognize 529 plans, or even Roths as a shelter.

You were obligated to pay IRS tax on any yearly income it generated.

This is a known issue.

Guess, you should have been visiting he boards more often.[V]

<i>nelsona non grata... and non pro</i>
leggwork
Posts: 5
Joined: Tue Aug 23, 2005 10:51 am

Post by leggwork »

hmmm, I'm not even sure if Univ Scholarships of Canada told me what the annual balance was vs. there being a pool of money that is now being paid out as X$/unit contracted. I'll have to check.

thanks for all the help Nelson,
bruce
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