Education savings options

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tyronen
Posts: 11
Joined: Fri Feb 11, 2005 8:22 pm

Education savings options

Post by tyronen »

I am on a TN-1 in Illinois. We are expecting a son in January. Our tentative plan is to remain in the US for 5-6 years and then return to Canada, but that could change. Thus we don't know for sure whether we will be in the US or Canada at the time our son goes to university, nor which country he would attend school in (or if he attends at all).

I was going to:

- Contribute C$4,000 per year into an RESP opened by my brother, a Canadian resident. This way I avoid US and defer Cdn taxes;

- Contribute US$4,000 per year into Illinois' 529 plan (BrightStart) as long as we are in the US. I understand earnings on this would be taxable in Canada if we returned there; this however wouldn't make us any worse off as we'd already be over the RESP limit.

Questions:

1) Is the above analysis correct?

2) Would funds in both plans (RESP and 529) be usable towards a university degree in either country?

3) Suppose we live in Canada when our son is university age. Would the 529 withdrawals be subject to tax in Canada, the US, or both?

4) Same question for RESP withdrawals while living in the US.
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

1. Yes. I would hasten to point out that I do not believe (although rules change on this yearly) that your brother can START an RESP for your son if he is already non-resident. He could have funded an existing one created while the child was in canada and then left. Maggie can likely clarify this.



2. Likely yes. you would need to look carefully at the IL plan's rules however.

3. The 529 withdrawls would not be subject to Cdn tax, as you already pointed out they would be taxable year-over-year. For US they would be taxable as normal 529 plan withdraws are (or are not).

4. Likewise for RESP payements. These would be viewed by IRS as gifts from your brother to your son (thus not taxable), but taxable (or not) in Canada as normal.

<i>nelsona non grata... and non pro</i>
tyronen
Posts: 11
Joined: Fri Feb 11, 2005 8:22 pm

Post by tyronen »

Thanks for the info. Actually, my brother <i>is</i> a Cdn resident so there should be no problem.

I was doing more research and came across another suggestion: US savings bonds, now paying an incredible 6.7 percent and effectively tax-deferred until redemption. Can I still hold these if I move out of the US? If I redeem while resident in Canada, do I pay tax to both countries or just to Canada?

Thanks for your help.

nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">Actually, my brother is a Cdn resident so there should be no problem.<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

You mis-understood my point. <b>Your son</b> will not be a Cdn resident, and therefore NO ONE can start an RESP for him, regardless of where the contributor may live. Had your sons, say, been born in Canada 5 years ago, and you or your brother started such a fund BEFORE your son left Canada, it could be continued, but it can't be started as things stand now.

If you but US savings bonds and defer taxation until you move back to Canada (asuming you do not become a US citizen or GC holder), then you will indeed only pay CDn tax on that 'last years' interest. The US will not collect tax. The same of course can be said on ANY non-real estate investment that you may buy: deferring income until you leave avoids US taxation on that income. This is the Cdn capital gains holiday for returnees that has been spoken of numerous times here.

<i>nelsona non grata... and non pro</i>
tyronen
Posts: 11
Joined: Fri Feb 11, 2005 8:22 pm

Post by tyronen »

It appears that they've changed the rules. Earlier this year the requirement seemed only to be that the individual held a SIN. I went to CCRA's site to verify; now it says "under proposed changes...if the [beneficiary] is resident in Canada when the designation is made". The document is dated "last revision Dec. 13, 2005".

Rats.

I guess I could make use of ETFs or anything that does not issue dividends or report cap gains until sold, then take advantage of the 'Cdn Roth'.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

This rule has been in place at least a year, so don't think that they just changed the rule. Besides, your child will take quite a while to get a SIN.

<i>nelsona non grata... and non pro</i>
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