I often get asked about the Canadian residency rules for RESP accounts. The rules are not that simple and in fact, make up one chapter in my RESP book which I’m reprinting below.
RESP accounts have benefits and risks. The benefits are the generous RESP contribution grants along with tax-sheltering. The risks are extra taxes and penalties if the child does not use the RESP money. Yes, there are ways to reduce RESP withdrawal penalties, but the fact is that there is likely still a penalty to be paid.
In my opinion, the benefits of the RESP outweigh the risks under normal circumstances. However, if your situation changes so that the odds of your child going to school are lessened, then you should consider not starting an RESP account or cease contributing to an existing one. You might be better just saving the money in a TFSA or open account where there are no consequences if the child doesn’t go to school.
One factor that could impact the usage of the RESP is Canadian residency. Bottom line is that the beneficiary must be a Canadian resident to receive the RESP grant. If the beneficiary is not a Canadian resident, they can still use the RESP for their education, but the the RESP grants will be returned to the government. If you are living in Canada and think you probably won’t stay in the country, you might want to avoid RESPs. It’s important to note that RESP money can be used if the child goes to school outside of Canada, as long as they maintain their Canadian residency.
You have time
You don’t have to commit to an RESP the day your child is born. In fact you can start an account as late as the year the child turns 15 and still get a decent of amount of RESP grants. If you have a child and you aren’t sure about where you will be living in a few years, hold off on the RESP until you are more certain.
- If you start an RESP in the year when the child turns 10, you can still get the maximum $7,200 RESP grants.
- If you wait until the year the child is 15 to start the RESP account, you can still get $3,000 of RESP grants.
Here is a link to the government’s definition for Canadian residency.
Here is a reprint of the shortest chapter of my book:
The Canadian residency rules for RESPs can be confusing because there are at least two parties involved with an RESP account — the subscriber and one or more beneficiaries.
The residency of the beneficiary is important because it determines if an RESP account can be opened and if it is eligible for contributions and RESP grants. The residency of the subscriber does not impact grants eligibility.
Residency of the subscriber
The person opening the account does not have to be a Canadian resident, but they have to have a valid Social Insurance Number (SIN). A non-resident subscriber can open an RESP account, make contributions, receive grants and initiate withdrawals. Note – although a non-resident with a SIN can legally open an RESP account, they might find that most financial institutions won’t allow it.
The tax-sheltered status of the RESP only applies to Canadian residents. If the subscriber or account owner is a non-resident, they might have to pay taxes on any income earned in the RESP account as well as capital gains, according to the rules of their resident country.
Residency of the beneficiary or child
The beneficiary of an RESP account must be a Canadian resident with a valid SIN in order to:
- Open an RESP account
- Make contributions to the account
- Receive RESP grants in the account
If the beneficiary of an RESP account becomes a non-resident, the account can be kept intact, but no contributions can be made and grants are not paid. If the beneficiary moves back to Canada and re-establishes Canadian residency, contributions can again be made and grants will be paid on contributions. No grant room will be accumulated for the time during which the beneficiary was a non-resident.
If the beneficiary has moved away from Canada and it is likely the beneficiary will be returning to Canada, it makes sense to keep the RESP account in place. If the beneficiary is not coming back to Canada, collapsing the account should be considered.
The beneficiary does not have to be a Canadian resident to use the RESP money for post-secondary education, however a non-resident will lose the grant amount of their RESP.
RESP money can be used to attend either a Canadian post-secondary school or a non-Canadian school.
- The subscriber does not have to be a Canadian resident in order for RESP grants to be paid to the RESP account.
- The subscriber must have a valid SIN to open an RESP account.
- The beneficiary must be a Canadian resident in order for RESP grants to be paid into the RESP account.
- If the beneficiary is not a Canadian resident, an existing RESP account can be maintained – but no contributions can be made.
- The tax-sheltered status of the RESP does not apply if the subscriber is a non-resident. Local tax rules will apply.