Principal Issues: (1) Whether the Act permits a distribution of property from an RESP trust (in-kind distribution) as a "refund of payments"; (2) whether, for purposes of the Act, an in-kind distribution from an RESP trust to a subscriber results in a disposition that occurs at fair market value (FMV); and, (3) the tax consequences to a subscriber where the FMV of the in-kind distribution from the RESP trust exceeds the "refund of payments".
Position: (1) Yes (2) Yes (3) The remaining amount will be an "accumulated income payment" which is generally subject to tax under Part I and Part X.5.
Reasons: (1) Subsection 146.1(1) of the Act does not set out any rules or limitations on the distribution of property as a "refund of payments". (2) Where an RESP trust makes a distribution (in-kind or otherwise) to a subscriber, the amount paid out of the plan constitutes a "disposition", as this term is defined in subsection 248(1) of the Act. The amount paid is considered to be at the FMV of the property at the time the amount was paid. (3) In accordance with the definition of "accumulated income payment" in subsection 146.1(1). Subsection 204.94(2) of the Act applies a 20% tax to amounts withdrawn as AIP where the amounts are not eligible for a rollover to another registered plan.
September 14, 2015
Mr. Mark Legault HEADQUARTERS
Manager Income Tax Rulings
Specialty Products Policy Section Directorate
Registered Plans Directorate K. Podor
18th Floor, 18-46
Place de Ville, Tower B
Ottawa, ON K1A 0L5
2015-058303
Registered Education Savings Plan (“RESP”)
We are responding to your correspondence dated April 23, 2015 wherein you requested clarification on the tax consequences of in-kind transactions in connection with a trust governed by a registered education savings plan (“RESP trust”). Specifically, you requested our opinion on the following:
a. whether the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (“Act”) permits a distribution of property from an RESP trust (in-kind distribution) as a “refund of payments”;
b. whether an in-kind distribution from an RESP trust to a subscriber results in a disposition that occurs at fair market value (“FMV”) for purposes of the Act; and,
c. the tax consequences to a subscriber, at the time a plan is terminated, where the FMV of the in-kind distribution from the RESP trust exceeds the “refund of payments”.
Our Comments
a) In-kind distribution as a “refund of payments”
Subsection 146.1(1) of the Act defines the term “refund of payments” to generally mean a return of all or part of the contributions made by or on behalf of a subscriber under an RESP trust. In our view, the Act does not prohibit an RESP trust from making an in-kind distribution as a “refund of payments” to a subscriber.
b) Distributions from an RESP trust
For purposes of the Act, the RESP trust and a subscriber are considered to be separate and distinct entities. Consequently, an in-kind distribution from an RESP trust to a subscriber will constitute a “disposition”, as this term is defined in subsection 248(1) of the Act, of the property by the RESP trust and an acquisition of property by the subscriber. The disposition and acquisition of the property will occur at the FMV of the property at the time of the distribution.
c) Amounts remaining in an RESP trust
At the time a plan is terminated, the FMV of an in-kind distribution from the RESP trust may exceed the amount received in satisfaction of a right to a “refund of payments” under the plan. The remaining amount paid out of the plan constitutes “accumulated income payments”. “Accumulated income payments” are included in the income of a subscriber and generally subject to an additional 20% tax under subsection 204.94(2) of the Act, except where the amount is eligible for a rollover to another registered plan.
We trust these comments satisfy your request.
Mary Pat Baldwin, CPA, CA
Manager
Deferred Income Plans I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
cc: Sonia Robidoux, Technical Policy Advisor; Josée Lortie Pagé, Technical Policy Advisor