RESP tranferred to grandparents

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

quickcanuck
Posts: 19
Joined: Mon Jun 27, 2011 2:10 pm

RESP tranferred to grandparents

Post by quickcanuck »

After filing 3520 and 3520a for the last 2 years, I transferred my son's RESP to an RESP account owned by his grandfather. In preparing one last go around of the 3520 and 3520a I am unclear as to how to show the transfer on the 3520a.

Does the transfer show on line 17a as a distribution (to a non-US person), or do I simply account for it as a negative adjustment on line 19 (other) of the balance sheet in Section III to bring the closing balance to 0 and include a statement?
areefer
Posts: 17
Joined: Thu Mar 10, 2011 5:12 pm

Post by areefer »

I'm thinking about doing this as well. How did you show this on the 3520/3520a forms? Did you have any issues?
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

I am also curious, as I have an RESP that I owned jointly with my spouse.

I figured that if I tried to just sign it over to my spouse, I'd probably end up in trouble- wouldn't it look like I just tried to hide my assets under my spouse's name?

So yes i'm also interested in how you report that the RESP, ie a foreign trust, has somehow moved its assets to someone else.

Sorry, I have no answers..
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Transfering it to a non-US spouse IS the correct way to proceed. It has been advoised here for years.

Currently, IRS is not persuing the avenue of "tainted" foreign trusts. So before they do, I would be moving it.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

wow, really??? I figured for sure that if I transfer my RESP away, they would flag it as tax evasion!

I will definitely do that.

Thank you nelsona.
areefer
Posts: 17
Joined: Thu Mar 10, 2011 5:12 pm

Post by areefer »

nelsona - how do we show such a transfer? is it as simple as putting a 0 as the balance on the 3520/3520a forms?

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

Post by nelsona »

I guess. There are threads on this.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Stevecanada
Posts: 24
Joined: Sun Mar 30, 2014 4:21 pm
Location: Canada

Post by Stevecanada »

Nelson and others - The 2013 instructions for Form 3520 state (near the top of page 3 - right side - 2nd paragraph):

"If a trust makes a gratuitous transfer to another trust, the grantor of the transferor trust is treated as the grantor of the transferee trust, except that if a person with a general power of appointment over the transferor trust exercises that power in favor of another trust, such person is treated as the grantor of the transferee trust, even if the grantor of the transferor trust is treated as the owner of the transferor trust."

I would assume that the above paragraph would mean that if a US citizen living in Canada owns an RESP and transfers the RESP to a Canadian relative who is not a US citizen or resident, the US citizen would (for IRS purposes) still be considered a grantor of the new RESP. If the US citizen is still considered a grantor of the new RESP, then the reporting requirements (3520, FBAR, etc) would not stop!

Does anyone have any idea whether my interpretation is correct? What exactly do these instructions mean (what does "person with a general power of appointment over the transferor trust exercises that power in favor of another trust" mean??)

Any help would be greatly appreciated.
Stevecanada
Posts: 24
Joined: Sun Mar 30, 2014 4:21 pm
Location: Canada

Post by Stevecanada »

I am a dual US / Canadian citizen, living in Canada for more than 30 years, with a Canadian wife. Our children are dual citizens. A number of years ago, my wife and I opened an RESP (family plan) for our kids.

I have seen a number of posts on this Forum suggesting that if I had my name removed from the RESP, I would no longer have to complete forms 3520 and 3520-A (and FBAR, etc).

However, the 2013 instructions for Form 3520 state (near the top of page 3 - right side - 2nd paragraph):

"If a trust makes a gratuitous transfer to another trust, the grantor of the transferor trust is treated as the grantor of the transferee trust, except that if a person with a general power of appointment over the transferor trust exercises that power in favor of another trust, such person is treated as the grantor of the transferee trust, even if the grantor of the transferor trust is treated as the owner of the transferor trust."

I would assume that the above paragraph would mean that if a US citizen living in Canada owns an RESP and transfers the RESP to a Canadian relative, the US citizen would (for IRS purposes) still be considered a grantor of the new RESP. If the US citizen is still considered a grantor of the new RESP, then I would expect that the reporting requirements (3520, FBAR, etc) would not stop!

Does anyone have any idea whether my interpretation is correct?

I think that this is an important point, as many US citizens who have taken out RESPs are likely in the same situation.
DaveM
Posts: 52
Joined: Thu Jun 12, 2014 12:46 am

Post by DaveM »

[quote="Stevecanada"]I am a dual US / Canadian citizen, living in Canada for more than 30 years, with a Canadian wife. Our children are dual citizens. A number of years ago, my wife and I opened an RESP (family plan) for our kids.

I have seen a number of posts on this Forum suggesting that if I had my name removed from the RESP, I would no longer have to complete forms 3520 and 3520-A (and FBAR, etc).

However, the 2013 instructions for Form 3520 state (near the top of page 3 - right side - 2nd paragraph):

"If a trust makes a gratuitous transfer to another trust, the grantor of the transferor trust is treated as the grantor of the transferee trust, except that if a person with a general power of appointment over the transferor trust exercises that power in favor of another trust, such person is treated as the grantor of the transferee trust, even if the grantor of the transferor trust is treated as the owner of the transferor trust."

I would assume that the above paragraph would mean that if a US citizen living in Canada owns an RESP and transfers the RESP to a Canadian relative, the US citizen would (for IRS purposes) still be considered a grantor of the new RESP. If the US citizen is still considered a grantor of the new RESP, then I would expect that the reporting requirements (3520, FBAR, etc) would not stop!

Does anyone have any idea whether my interpretation is correct?

I think that this is an important point, as many US citizens who have taken out RESPs are likely in the same situation.[/quote]

You raise an interesting point, but I think there may be significance in the fact that it says 'is treated as the grantor' rather than 'is treated as the owner' of the trust. The instructions for both forms 3520A and 3520 under 'Who Must File' specifically reference the 'owner' not the 'grantor'.

The 'Who Must File' section apparently determines who is an 'owner' based on Sections 671 thru 679 (some of the most obscure legalese you will ever read). It is interesting that Section 678 has to do with 'Person other than grantor treated as substantial owner'. Initially, it says:

'(a) General rule
A person other than the grantor shall be treated as the owner of any portion of a trust with respect to which:
(1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself...'

I'm no lawyer or accountant (nor have I played either on TV), but if I were to transfer the assets from an RESP of which I am the subscriber to an entirely new RESP where a relative was the subscriber how could I possibly be looked on as the owner of the new RESP. I would have no right of control over any part of it. In fact -adding an additional fly in the ointment- as anyone who is familiar with RESP knows, any subscriber doesn't even have total control over the CESG or accrued interest.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

I agree with daves interpretation.

There has been talk for a few years now that Treasury will tighten these regulations to prevent non-resident spouses from taking over control of foreign trusts to allow citizen spouses to avoid trust reporting, but this has not yet happened as far as I know.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
areefer
Posts: 17
Joined: Thu Mar 10, 2011 5:12 pm

Post by areefer »

quickcanuck or anyone else who has done this - any guidance on how to fll out 3520/3520a for the last time?

I'm assuming that I just show a closing balance of 0, but I would like confirmation from someone who has done this.

Thanks.
DaveM
Posts: 52
Joined: Thu Jun 12, 2014 12:46 am

Post by DaveM »

I am in the same process of completing the 2014 3250a showing a transfer of the entire RESP assets to the non-US (ie. Canadian) mother of the beneficiaries.

My plan:
1. Check 'Yes' for Part I, Line 5 and include a Statement as per the 3250a Instructions- this seems to be very important given the detail given in the instructions.
2. Enter the total amount of the RESP transferred in Part II, Line 17a and also reference the same Statement as used in Part I, Line 5 above. My accountant had suggested putting the Canadian mother's info in 17b, but I don't think that is correct since 17b specifically says 'Distribution to U.S. Owners'. Since Line 17 says, 'Enter the fair market value fo total distributions from the trust to all persons, whether U.S. for foreign', it seems to me that the message is pretty explicit about what is wanted in 17a when it comes to U.S. Owner or otherwise. Besides the Statements will give the name, nationality and location of the mother.
3. As suggested by Accountant, in Part III, Line 19, right after the 'Other (attach statement)' (ie. not in space under (d)), put the amount transferred as a negative number and then include a Statement similar to those previously.
4. And, of course, make sure that all entries under Part III End of Tax Year (d) are zeros.
5. Make sure that Page 3, Line 9 is zero.

Would be interested in any comments from others.
DaveM
Posts: 52
Joined: Thu Jun 12, 2014 12:46 am

Post by DaveM »

I have a question about transferring the assets of the RESP to a Canadian, non-US resident mid-year (perhaps Nelsona if he would be so kind?): It may seem obvious, but many things regarding RESPs aren't obvious: Would it be best to use the US-Can$ exchange rate of the actual date of the transfer in establishing the value of funds transferred rather than the 2014 end-of-year rate?
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The principle the IRS adheres to for exchange rate (which is more strict that CRA) is that each single transactions should be valued individually. Only multiple periodic transactions can use an averaged exchange rate over that specific period.
The year-end rate would never be used in this case.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply