My child was born in the US, has dual citizenship, and will probably reside in Canada for the foreseeable future. I'm Canadian only. I've opened an RESP, but US relatives have offered to start a 529 plan in NY. What are the tax implications for a child in this circumstance who, say, never leaves Canada and attends university in Canada? What if this child stays in Canada until 18, and then attends school in the US? Given that 529 funds flow to the recipient tax-free (at least if in the US), is there a dominant strategy here in terms of funneling funds into either the RESP or 529 plan? I suspect the answer is "it depends", primarily on issues like where the child goes to school, and that's unknowable at this time. But I thought I'd put it out there and see if anyone has some suggestions.
Many thanks.
529 vs. RESP
Moderator: Mark T Serbinski CA CPA
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Mark T Serbinski CA CPA
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Withdrawals from a U.S. 529 plan are tax free only if the funds are withdrawn for qualified education purposes. This is defined as any expenditure for an institution which is eligible for U.S. federal education benefits.
Therefore, a Canadian institution would not qualify, and you risk having the 529 plan taxable on distribution.
I would stick to the RESP if you forsee that your child will attend university in Canada.
Therefore, a Canadian institution would not qualify, and you risk having the 529 plan taxable on distribution.
I would stick to the RESP if you forsee that your child will attend university in Canada.
Mark
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napstolean
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Hi Mark, and thanks very much for your response.
Are you sure that Canadian schools don't qualify? My understanding of 529s is that they are fairly liberal in terms of eligible education expenses. Moreover, the funds flow to the student US federal tax free if the student attends an "eligible educational institution". From various 529 plan brochures, I understood that includes any school, foreign ones included, and in particular those that are assigned a Federal School code (for example, the U of Toronto's Federal School code is G06688, Trinity College Oxford is also listed; one can look up whether a school is eligible for Federal Student Aid by searching http://www.fafsa.ed.gov/fotw0607/fslookup.htm .
To quote one source, "Eligible education institutions are any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education; this includes virtually all accredited public, nonprofit and proprietary (privately owned, profit-making) post-secondary institutions." As I understand it, if the school has a Federal School Code, it's eligible, and both U of T and Oxford, for example, have codes.
If this is correct, there may be advantages to 529 plans even if a student attends school in a "foreign" country like Canada.
Are you sure that Canadian schools don't qualify? My understanding of 529s is that they are fairly liberal in terms of eligible education expenses. Moreover, the funds flow to the student US federal tax free if the student attends an "eligible educational institution". From various 529 plan brochures, I understood that includes any school, foreign ones included, and in particular those that are assigned a Federal School code (for example, the U of Toronto's Federal School code is G06688, Trinity College Oxford is also listed; one can look up whether a school is eligible for Federal Student Aid by searching http://www.fafsa.ed.gov/fotw0607/fslookup.htm .
To quote one source, "Eligible education institutions are any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education; this includes virtually all accredited public, nonprofit and proprietary (privately owned, profit-making) post-secondary institutions." As I understand it, if the school has a Federal School Code, it's eligible, and both U of T and Oxford, for example, have codes.
If this is correct, there may be advantages to 529 plans even if a student attends school in a "foreign" country like Canada.
Certainly 529 plans can be used for studying at foreign (non-US) universities.
The problem with both 529s and RESPs, for the family that moves between Canada and the US, is that neither country recognizes the other's plan as tax-sheltered.
If the NY relatives are offering to fund the 529, then that would seem very attractive. It's hard to have too much college savings, nowadays. I don't know whether Canada would expect to tax the yearly earnings in your child's hands because they're the beneficiary (I expect some expert here will know this, though). From my fairly naive perspective, if you're not funding the account I can't see that Canada should expect you to pay tax on it.
The problem with both 529s and RESPs, for the family that moves between Canada and the US, is that neither country recognizes the other's plan as tax-sheltered.
If the NY relatives are offering to fund the 529, then that would seem very attractive. It's hard to have too much college savings, nowadays. I don't know whether Canada would expect to tax the yearly earnings in your child's hands because they're the beneficiary (I expect some expert here will know this, though). From my fairly naive perspective, if you're not funding the account I can't see that Canada should expect you to pay tax on it.
All Us students attending Cdn Universities are eligible for US federal education benefits. In fact most have webpages for their US students on how to claim those benefits.
A 529 plan for your child, set up by someone else is a great and valuable gift. I would simply have the NY residents be sure of their state's rules on eligibility of the recipient.
In Canada, the child would be taxed on it when he takes the funds, just like one would in the US, but as long as he has qualifying expenses, he will owe no tax.
A 529 plan for your child, set up by someone else is a great and valuable gift. I would simply have the NY residents be sure of their state's rules on eligibility of the recipient.
In Canada, the child would be taxed on it when he takes the funds, just like one would in the US, but as long as he has qualifying expenses, he will owe no tax.
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Mark T Serbinski CA CPA
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napstolean
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Sorry - I'm not trying to be pedantic about things like school codes. But the question arises: is there an advantage to a Canadian funding a 529? Compared to an RESP, it's definitely a better plan, if you can take full advantage of it: full tax deductibliity of contributions at the time of contribution, tax free growth, no federal tax if used for education. If the child goes to school in the US, it's a no brainer. And it would appear to me that even if the child goes to school in Canada, I'm no worse off. I don't get the tax benefit of the contributions, but so what? I don't get that with an RESP. And although it would be taxable at distribution, the odds are student expenses would minimize the tax.
But I'm worried that CRA would try to find a way to tax the earnings in a 529 account before distribution. The counter-agrument is that since there's a risk the child won't use the 529, in which case the child gets no money, it hardly seems fair to tax them on something they might not ever get. Still, CRA has never ever spend any time worrying about "fair", and I just don't want to get tripped up here.
But I'm worried that CRA would try to find a way to tax the earnings in a 529 account before distribution. The counter-agrument is that since there's a risk the child won't use the 529, in which case the child gets no money, it hardly seems fair to tax them on something they might not ever get. Still, CRA has never ever spend any time worrying about "fair", and I just don't want to get tripped up here.
Since there's no provision concerning 529s in the Canada-US tax treaty, tax experts say that a Canadian resident funding a 529 should be paying tax on the earnings, on a year-by-year basis. Then the US is going to tax the earnings on withdrawal!
You're mistaken about "full tax deductibility of contributions at the time of contribution". Like RESPs, 529s are funded with after-tax dollars. Some states do give a limited state tax deduction for contributions. This is a pretty small benefit, and of course it's only useful if you reside in the sponsoring state.
Apart from the preceding rather large issues, I'd generally agree with you that 529s are a more attractive college savings vehicle than RESPs. More flexible, etc. and some have excellent rates of return. The internal rate of return on my contributions to the Georgia 529 plan over the last 3 years is 9.36%. That's an inflation-adjusted real rate of return close to 7%. Don't know if TIAA-CREF is going to be able to keep up this performance, but right now I'm pretty happy with our decision to get rid of the RESP and open a 529 after our move to the US.
You're mistaken about "full tax deductibility of contributions at the time of contribution". Like RESPs, 529s are funded with after-tax dollars. Some states do give a limited state tax deduction for contributions. This is a pretty small benefit, and of course it's only useful if you reside in the sponsoring state.
Apart from the preceding rather large issues, I'd generally agree with you that 529s are a more attractive college savings vehicle than RESPs. More flexible, etc. and some have excellent rates of return. The internal rate of return on my contributions to the Georgia 529 plan over the last 3 years is 9.36%. That's an inflation-adjusted real rate of return close to 7%. Don't know if TIAA-CREF is going to be able to keep up this performance, but right now I'm pretty happy with our decision to get rid of the RESP and open a 529 after our move to the US.
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napstolean
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