The RESP – Who really owns it?

It is clear that the registered education savings plan (RESP) has become an extremely popular tool among families looking to save for their children’s increasingly expensive education. What may be unclear though is who actually owns the funds within an RESP at specific stages during the plan’s lifetime.

What is an RESP? An RESP is a contract between an individual (the subscriber, typically a parent(s) or grandparent(s)), the Minister for the purposes of the Canada Education Savings Act (i.e. educational grant and bond eligibility payments) and a person/entity who is the promoter and administrator of the RESP. Under the contract, the subscriber can name one or more beneficiaries (future students) and agrees to make contributions for their eventual financial benefit. The Minister will then pay grant and bond entitlements into the plan based on eligibility conditions with the trigger being contributions, on behalf of the beneficiaries.

Who owns the funds in an RESP?  Under the Income Tax Act of Canada (ITA), the subscriber is entitled to a refund of all their contributions made into the RESP. Grant and bond payments are preserved against the plan value and if a refund of contributions is requested, any grant or bond entitlements received on those refunded contributions are returned back to the government as they are not being used for educational purposes. The refund of contributions is received free of tax since they are made with after-tax proceeds.

Educational Assistance Payments (EAP) are authorized payments from the RESP to the beneficiary that consist of contributions, growth in the plan and grant and bond entitlements. They are specifically authorized payments to be used for educational purposes that must meet specific conditions. They are directed by the subscriber of the plan and these payments are taxable to the RESP beneficiary who is often earning no or low amounts of income placing them in a low overall tax bracket.

Accumulated Income Payments (AIP) are authorized non-educational payments of any residual growth in the plan to the RESP subscriber. They are penalized heavily, in addition to the application of the mandatory withholding tax, if the AIP is requested in cash. That said, there is an opportunity to contribute an amount of up to $50,000 to the subscribers’ RRSP provided they have the requisite contribution room. Doing so will avoid the penalty and withholding tax and results in a tax-deferral of the amounts.

What about the RESP beneficiary? Under the ITA, the RESP beneficiary normally enjoys the potential use of the RESP funds by applying them toward the cost of their education and is also taxed on any grant and growth amounts withdrawn from the plan as EAPs. Despite these two facts, the RESP beneficiary normally never owns the funds in the plan unless they are paying the dual roles of subscriber and RESP beneficiary.

What happens in a marriage breakdown? What might muddle this otherwise clear question of ownership are the constraints placed on an RESP after the breakdown of the marriage or common-law partnership of the parents of the RESP beneficiary. The subscriber(s) continues to be the owner(s) of the plan and the RESP would remain with the subscriber(s) though a resulting judgment by a court or separation agreement may restrict any withdrawals from the RESP that are not for the exclusive benefit of the beneficiary of an RESP who is the child of the separating couple. The RESP can remain as joint subscribership, and the separating parties can continue managing the plan on behalf of the RESP beneficiaries and contribute independently. Alternatively, they can split the RESP into two separate plans with one subscriber to each plan without being penalized.

Use of separation agreements Separation agreements can create both clarity and a legal obligation with respect to treatment and use of an RESP before, during or shortly after a marriage breakdown. Matters such as the following can be determined provided it is discussed and agreed to:

• Who will remain as the subscriber(s) of the RESP? Will the RESP be divided between the separating parties, or will the full account be transferred to one of the subscribers?
• Given the new financial responsibilities arising from the marriage breakdown, who will continue to contribute to the RESP moving forward?
• How will withdrawals be handled and what is the agreed upon use for the funds: to fund any immediate educational expenses (e.g. for the current graduate program) as they come due or to preserve certain amounts as part of a broader longer-term education expense plan (e.g., costs associated to a post-graduate program)?
• What will happen to the funds if one or more of the RESP beneficiaries do not pursue post-secondary education or they have completed their schooling and there are residual assets left in the plan?

How do the provincial/territorial family division laws treat RESPs? Generally, the law on division of family property across Canada is defined as assets owned by either spouse at the time of marriage breakdown without any regard to legal title of the property. Property generally includes the family home, vacation properties, investment assets, business interests, banking and checking accounts, pensions and retirement accounts, insurance policies, and other valuable collections such as art, vehicles, and digital assets. There are exceptions to what can be included or excluded, depending on the provincial/territorial legislation and in some cases can exclude property acquired prior to the relationship, though certain conditions must apply for its exclusion. The question remains however, what to do about the RESP property given the primary intent and purpose for the account is for the benefit of the children’s future education. If the separating individuals cannot agree with respect to the RESP, the matter is often left with the courts to decide.

One case comes to mind when looking at the ownership of funds within an RESP after a relationship breakdown of one or both of its subscribers. In British Columbia, in the case C.A.S. v. A.M.S., 2002 BCSC 1558, the mother of the RESP beneficiary neglected to follow a consent order issued upon her divorce from the father of the RESP beneficiary. The mother withdrew the amounts freely from the RESP and even replaced the RESP beneficiary of the plan with other individuals despite restrictions within the order prohibiting such action. 

The Court found that the mother as subscriber of the RESP broke her fiduciary duty to her child as the RESP beneficiary. A fiduciary duty normally implies that a property must be managed with a focus on the best interests of the beneficiaries who may own the property or have a right to the income it generates. The citing of a fiduciary duty here is important, as RESP beneficiaries do not own the funds within the RESP nor do they normally have a right to RESP income. However, a fiduciary relationship was created between the subscriber and RESP beneficiary through the consent order that required the funds to be held by the mother as subscriber, but managed and used exclusively for the education of her child as RESP beneficiary. The Court eventually sided with the RESP beneficiary by requiring amounts remaining within the RESP and previously withdrawn from it be paid to the RESP beneficiary with interest. This unfortunate case demonstrates that the question of ownership of an RESP may become less clear when judgments by court or separation agreements are brought into the mix. 

How do the courts view the RESP? The courts’ view of the RESP varies and sometimes case law is inconsistent with respect to their approach.

In Alberta, case law has deemed that RESPs are to be treated as funds held in trust for the RESP beneficiaries and are not considered marital property subject to division. One of the main concerns is what happens with any excess RESP funds after all the RESP beneficiaries have completed their post-secondary education? Case law on this matter depends on the facts, with some case having the residual proceeds split equally among the RESP beneficiaries (see Delorme v Delorme, 2017 ABQB 699). In other cases, any remining funds were to be split equally to the subscribers despite only one of the separating parties being named as the RESP subscriber (see Bzdziuch c Bzdziuch, 2001 ABQB 306).

In Ontario, the courts have held that an RESP does not form part of the property of either spouse to be equalized but there is room for the separating parties to agree to treat the RESP as an asset for the children and preserve it for educational purposes. The case law in Ontario has not necessarily been consistent with its approach to dividing or maintaining the RESP for its intended purpose. Some cases indicate that the RESP belongs to the subscriber and not the beneficiary to be shared between the separating individuals (see Chong v Donnelly, 2021 ONSC 5263) while other cases deem the RESP to be held in trust for the beneficiary assuming the three certainties for a trust are in place and to be used and held to and for the benefit of the RESP beneficiaries (see McConnell v. McConnell, 2015 ONSC 2243).

Conclusion As with most marriage breakdowns, getting the right detailed advice is crucial to understanding how an RESP is to be treated and how it will continue to be managed. Consider multiple scenarios in the separation plan with respect to some of the issues discussed in this article in effort to avoid any surprises.