RESP Anti-Avoidance Rules You Should Know
RESPs, like many other programs and plans, are subject to various anti-avoidance rules. March 2017 witnessed the extension of anti-avoidance rules that govern the registered plans of heritage education funds RESPs.
The goal of the rules is to slap special taxes on specific advantages that improperly exploit the RESP and its attributes. There are also taxes for prohibited investments and on non-qualified ones. Let’s take a look at them.
Taxes on Non-Qualified Investments
Non-qualified properties acquired by the heritage RESP trust or previously owned properties that have become non-qualified are subject taxes, which will be shouldered by the subscriber of the RESP.
The tax is 50% of the property’s fair market value at the time it was acquired or it became a non-qualified investment. In special circumstances, the tax is refundable, such as when the property ceases to be a non-qualified investment.
The subscriber will also be liable for the 100% advantage tax on non-qualified investment income if the income has not been withdrawn properly.
Taxes on Prohibited Investments
If the RESP acquires a prohibited investment or property, or if an previously acquired property becomes prohibited, the investment will shoulder a special tax that’s equal to 50% of the investment’s fair market value.
The subscriber is also shouldering 100% advantage tax on the income earned and capital gains obtained from the prohibited investments.
However, when the property ceases to be a prohibited investment while the RESP trust still holds it, it is considered to have been disposed of and then re-acquired immediately at its fair market value.
If the investment is considered both non-qualified investment and a prohibited investment, then it is considered as a prohibited investment only.
Taxes on an Advantage
You will have to shoulder 100% tax on transactions that took place, as well as profits obtained and capital gains, after March 22, 2017.
If the subscriber or the person no dealing at arm’s length with the subscriber was provided with an advantage related to the heritage RESP trust within a year, taxes will be incurred at:
• The fair market value of the benefit (in the case of benefits)
• The amount of loan or debt (in the case of a loan or debt)
• The amount of registered plan strip (in the case of a registered plan strip)
You must keep in mind, however, that if the advantage has been extended by the promoter, he or she will be the one to shoulder the taxes. The promoter must then file Form RC298, or the Advantage Tax Return for RRSP, TFSA, or RESP issuers or RRIF carriers.
If you’re the one shoulder the taxes, you must file Form RC339, or the Individual Return for Certain Taxes for RESPs, RRIFs RESPs, or RDSPs. This must be filed on or before June 30 of the succeeding year.
The advantage rules do not apply to the benefits related to a swap transaction if that transaction is:
• Finished before 2022 and is done to get rid of a property from an heritage RESP. it would then be logical to conclude that the tax related to advantages, prohibited, and non-qualified investments would be payable if the property had been retained in the plan.
• Finished before 2017.