R.A. Albert 957-2101
March 12, 1987
Dear Sirs:
Re: Payments to Students under Registered Educational Savings Plans(RESPs) where the Underlying Investment is a Mutual Fund
This is in response to yours dated February 20, 1987, wherein you inquired whether capital gains earned in RESPs maintain their status on payout to qualify for the $500,000 lifetime capital gains exemption.
Section 146.1 of the Income Tax Act (the "Act") deals with RESPs and Interpretation Bulletin IT-308R (enclosed) assists in setting out the Department's position. Basically, an RESP is a contract between a subscriber and a promoter under which, in consideration of payments made by the subscriber, the promoter agrees to make educational assistance payments to a beneficiary. The payments or contributions made by the subscriber to the promoter are not deductible. The payments are held in a trust which accumulates income tax free. However, the educational assistance payments are taxable in the hands of the beneficiary under paragraph 56(1)(q) and subsection 146.1(7) of the Act.
Educational assistance payments are defined in the Act to be any amount, other than a refund of premiums, paid under an RESP to a beneficiary to assist him to further his education at the post-secondary level. The refund of the premiums or contributions made by the subscriber are not taxable.
Unless the plan existed before 1972, all amounts paid out of the plan to or on behalf of a beneficiary of the plan are included in the beneficiary's income regardless of the source of the income in the plan. Thus, though the contributions may have been invested by the trust in mutual funds and earned interest, dividends or capital gains, these amounts are fully taxable as ordinary income upon payment to a beneficiary as educational assistance payments. With regards to your specific inquiry, as income earned on the contributions made do not retain their status on payout, the $500,000 lifetime capital gains exemption cannot be applied.
If the plan existed before 1972, an amount in respect of the tax paid income of the plan is deductible in determining the amount to be included in the beneficiary's income. This is explained in paragraph 8 of the Interpretation Bulletin.
We trust that the above will be of assistance to you.
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch