RESP EAP Withdrawals Cross-Border: How Is the Educational Assistance Payment Taxed?

When a beneficiary of a Registered Education Savings Plan (RESP) enrolls in a qualifying post-secondary program, the subscriber requests educational assistance payments (EAPs). The EAP consists of the accumulated income (investment growth) and the Canada Education Savings Grant (CESG) and other government incentives. It does not include the subscriber’s original contributions (those come out as a separate, tax-free refund of contributions). On the Canadian side, the EAP is taxable income to the beneficiary, typically at a low rate because students usually have little other income. On the US side, the treatment depends on whether the subscriber, the beneficiary, or both are US persons.

How is the EAP taxed in Canada?

The EAP is included in the beneficiary’s income for the year, reported on a T4A slip issued by the RESP promoter. The amount includes:

• Accumulated income. The investment growth inside the RESP.
• CESG and other grants. The Canada Education Savings Grant, the Canada Learning Bond, and any provincial grants that were paid into the RESP.

The subscriber’s contributions are not included in the EAP. They are returned to the subscriber as a refund of contributions, tax-free (since they were not deducted when contributed).

Because the beneficiary is typically a full-time student with little other income, the effective Canadian tax on the EAP is often zero or very low (the basic personal amount, tuition credits, and the education amount absorb most or all of the income).

How is the EAP taxed for a US-person subscriber?

If the subscriber is a US citizen, green card holder, or US tax resident, the RESP is a foreign trust for US purposes. The annual income accruing inside the RESP is reportable on the subscriber’s US return each year under the foreign trust grantor rules. This means:

• Annual income already reported. The investment growth, CESG, and other grants received inside the RESP should have been included in the subscriber’s US gross income each year (on Form 3520/3520-A if the RESP is reported as a foreign trust).
• EAP withdrawal. When the EAP is paid to the beneficiary, the subscriber has already reported the income. The EAP itself is not taxed again on the subscriber’s US return (it is a distribution of previously taxed income from the trust).
• Basis tracking. The subscriber’s basis in the RESP includes the original contributions plus the income already reported on US returns. Distributions reduce the basis.

The complexity is in the annual reporting, not the withdrawal. If the subscriber has been reporting the RESP income correctly each year, the EAP is straightforward. If the subscriber has not been reporting (which is common, because many cross-border families don’t realize the RESP is a foreign trust for US purposes), the streamlined filing procedures may be needed to catch up.

How is the EAP taxed for a US-person beneficiary?

If the beneficiary is a US person (for example, a US citizen born in Canada whose parents opened an RESP), the EAP is includable in the beneficiary’s US gross income in the year it is received. The beneficiary reports the income on the US return and claims a foreign tax credit for any Canadian tax paid on the same income.

• Filing requirement. If the EAP (plus any other income) exceeds the US filing threshold for the beneficiary, a US return is required. For a dependent child, the threshold is $1,300 in unearned income (the EAP is unearned income for US purposes).
• Education credits. The beneficiary may be eligible for US education credits (American Opportunity Credit or Lifetime Learning Credit), which offset US tax on the EAP. However, these credits are only available for expenses paid to eligible educational institutions, which must be in the US or certain foreign institutions that participate in US student aid programs.
• FTC. The Canadian tax withheld on the T4A (or paid on the beneficiary’s Canadian return) is creditable on the US return via Form 1116.

What if the beneficiary studies in the US?

If a Canadian RESP beneficiary enrolls in a qualifying post-secondary program at a US institution, the EAP is still available. The program must be a designated educational institution or a university outside Canada where the student is enrolled full-time in a course of at least 13 consecutive weeks. Most accredited US universities and colleges qualify.

• The Canadian tax treatment does not change: the EAP is taxable to the beneficiary in Canada. But if the beneficiary has moved to the US and is a US tax resident (for example, by being a US citizen or a student on a visa who meets the substantial presence test), both countries tax the EAP, and the FTC coordinates.

What about FBAR and Form 3520?

The RESP triggers several US reporting obligations beyond the annual income inclusion:

• FBAR (FinCEN 114). The subscriber must report the RESP on the FBAR if the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the year. The RESP is a foreign financial account for FBAR purposes.
• Form 8938 (FATCA). The RESP must be reported on Form 8938 if the subscriber meets the reporting thresholds ($200,000 at year-end or $300,000 at any time for taxpayers living outside the US).
• Form 3520/3520-A. If the RESP is treated as a foreign trust, the subscriber must file Form 3520 (Annual Return to Report Transactions with Foreign Trusts) and the RESP promoter should provide the information for Form 3520-A (Annual Information Return of Foreign Trust with a US Owner), though in practice the subscriber often prepares the 3520-A based on statements from the RESP promoter.

What should I do next?

If you are a US-person subscriber with an RESP, confirm that you have been reporting the annual income and filing the required forms. If you have not, consider the streamlined filing procedures. If your child is a US-person beneficiary about to receive EAPs, file a US return for the child reporting the EAP income with the FTC for Canadian tax paid.

• Cross-border RESP planning, the annual reporting obligations during the accumulation phase
• What happens to your RESP and CCB when you move to the US?, the move-date decisions
• US citizen child born in Canada, the filing thresholds and FBAR obligations from birth
• Form 3520 penalties: can I fight them?, the penalty relief options for late or missing foreign trust returns
• Streamlined filing for Canadian accounts, the catch-up procedure

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.