On Tuesday, I blogged about Registered Education Savings Plans (“RESPs”), the statute governing their administration, and the difference between Family Plans and Individual Plans.
When people usually hear about RESPs though, they often think that it is some kind of trust. However, that is most likely not the case.
What Are Trusts?
The general structure of a trust under Canadian law is that a settlor gives property to a trustee for the benefit of some third party. In turn, the trustee holds legal title to the property but is bound by fiduciary duties to administer such trust, on behalf of the beneficiary.
To create a trust, under Canadian law, there must be:
1) A certainty of intention;
2) A certainty of subject matter; and
3) A certainty of object.
How are RESPs Different?
In the case of an RESP, as discussed previously, the subscriber keeps title to the property until the beneficiary uses it for his/her post-secondary education. A promoter, which is the financial institution that is administering the RESP, similarly does not take title to the property in the RESP. As such, the property belongs to the subscriber until such time that the beneficiary attends a post-secondary institution, or a successor subscriber is appointed.
How Have the Courts Treated RESPs?
Multiple courts have held that the RESP does not meet the criteria of “certainty of intention”, and as such, it cannot be considered a trust.
The Alberta Court of Queen’s Bench held that a person who filed for bankruptcy was not holding the RESP for the exclusive benefit of her children but, rather, that she could have cancelled the plan at any time (see Payne, Re (2001), ABQB 894, 109 ACWS (3d) 687). This Court further held that since there was no intention to create a fiduciary relationship in the case of an RESP, it did not meet the certainty of intention. The same result was reached by the New Brunswick Court of Queen’s Bench and the Saskatchewan Court of Queen’s Bench (see Vinneau, Re (2007), NBQB 332, 160 ACWS (3d) 939 and MacKinnon v Deloitte & Touche Inc. (2007), SKQB 39, 155 ACWS (3d) 27).
The Ontario Superior Court of Justice has, however, come to a different conclusion. The Court held that the subjective intent at the time of the creation of the RESP could create a trust (see McConnell v McConnell (2015, ONSC 2243, 252 ACWS (3d) 300). This case dealt with a family law dispute and the question arose whether an RESP belonged to the beneficiary child or the subscriber parent. The Court did not consider certain characteristics of an RESP that are not congruent with the finding that it is a trust, such as the fact that a subscriber may collapse the RESP at any time, as well as use it as security for a loan.
As such, it is possible that McConnell v McConnell could be restricted to the facts at hand and assessed in the context of the circumstances that the Court was presented with; namely, whether or not to attribute an asset to the child or the parent, in a divorce proceeding.
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Registered Education Savings Plans or “RESPs” are education savings accounts registered with the Canada Revenue Agency. RESPs are used by individuals to save for their children’s post-secondary education. Once it is registered, it becomes the repository for education savings incentive payments made on behalf of an eligible beneficiary.
RESPs are a creature of statute and are governed by section 146.1 of the Income Tax Act (the “Act”). An RESP must be terminated by the end of the 35th year, following subscription.
A subscriber of an RESP is the person who makes contributions, and in whose name it is registered. A beneficiary, on the other hand, is a person on whose behalf the subscriber opens the RESP.
There are two types of RESPs that one could subscribe to: a family plan and an individual plan.
Under a family RESP, the subscriber can name one or more children as beneficiaries with the requirement that each beneficiary be related to him or her by blood or adoption.
A “blood relationship” is defined under section 250(2) and (6) of the Act, as a relationship between:
- a child and his/or her parents;
- a child and each set of his or her grandparents; and
- a child and each set of his or her great-grandparents.
An aunt/uncle, niece/nephew or cousins, are not considered related by “blood” under the Act.
A relationship by “adoption” includes both legal adoption and “adoption in fact”. When a beneficiary is legally adopted s/he is considered to be connected to the adoptive parents and both sets of grandparents and great-grandparents. Where, however, a legal adoption has not taken place, an “adoption in fact” may exist. For example, the beneficiary is considered to be the adopted child “in fact” of the common-law relationship, if the spouse provided parental care on a continuing basis.
An aunt/uncle, niece/nephew or cousins, are not considered related by adoption under the Act.
Under an individual plan, only one child can be named as a beneficiary; however, there is no requirement that the beneficiary be related to the subscriber under the Act. In fact, the subscriber can even name himself or herself as a beneficiary under such an RESP.
In addition to the statutory provisions of the Act that deal with RESPs, the contract between the subscriber and the promoter (the organization administering the RESP), can provide additional terms and conditions. It is important to review such terms before choosing the promoter that suits your needs, as the contract can provide further restrictions than the statutory framework of the Act.
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Families with young children are encouraged to start saving for their education as early as possible. The RESP is one of the most popular methods used to accomplish this; however, it is not uncommon for it to become the subject of disputes if the parents later separate or divorce. One of the issues that arose this past year specifically looked at the possibility of a spouse removing the other as co-holder of an RESP that was created for the benefit of their mutual children. By categorizing the RESP as a trust, the court held that in certain circumstances, removal was a possibility.
In McConnell v McConnell (2015 ONSC 2243, CarswellOnt 4939), the court looked at the nature of the RESP. It determined that it is essentially a trust fund held by a trustee on behalf of the children, who are the beneficiaries. Furthermore, as long as the three certainties are met, there is no real need for an express declaration of trust.
By determining that the RESP is a trust, the removal of a spouse as co-holder can be looked at through the lens of trust law. The court concluded that trustees of an RESP must be able to act unanimously. If the trustees cannot cooperate to the detriment of the beneficiaries, then removal of a trustee may be appropriate.
Removal of a spouse as co-holder of an RESP is not a novel concept. However, the categorization of the RESP as a trust now allows the courts to do so through established recourses traditionally available for the removal of trustees. The parent account holder as a trustee may be held to higher standards of accountability as a fiduciary. As such, for those seeking to have a co-trustee removed, remedies for breach of fiduciary duties may be available.
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For those of us with young children (or perhaps, not so young children), one of the many things that may be on our “to do” lists before December 31st is to contribute to a Registered Education Savings Plan (“RESP”).
As most of us know, RESPs allow for tax-efficient savings for a child’s post-secondary education. There are two types of RESPs: a family plan RESP or an individual plan RESP. With a family plan, a subscriber can name one or more children as beneficiaries, with the requirement that each beneficiary be related by blood or adoption to the subscriber. In an individual plan, only one child can be named as a beneficiary, and there is no requirement that the beneficiary be related to the subscriber. In addition to other incentives, when a subscriber contributes money to an RESP, the federal government will deposit an additional amount – the Canada Education Savings Grant (“CESG”) – equal to 20% of the contribution up to certain limits. The maximum CESG each year is $500 (equal to 20% of a contribution of $2,500) and the lifetime CESG limit is $7,200. A subscriber can contribute any amount to an RESP, subject to a lifetime contribution limit of $50,000 per beneficiary. Contributions can be made to an RESP for up to 31 years, and an RESP can remain open for a maximum of 35 years.
However, what most of us do not know is what happens to an RESP on the death of the subscriber. The answer depends largely on the terms of the subscriber’s Will, if any, and on the terms of the RESP contractual agreement.
Unlike an RRSP, RRIF, or a TFSA, the proceeds of an RESP do not flow outside of the subscriber’s Estate into the hands of a designated beneficiary. Regardless of who is named as the beneficiary of an RESP, the RESP forms part of the subscriber’s Estate, and should be administered in accordance with the Will, if any, or the laws of intestacy.
While the subscriber is alive, ownership and control of the RESP remains with the subscriber. An individual and his or her spouse may be joint subscribers of an RESP. Where there are joint subscribers, in the event that one subscriber dies, the surviving spouse will become the sole subscriber. In the event that the sole subscriber dies, the subscriber’s Estate becomes the subscriber.
A subscriber of an RESP should therefore give consideration to whether it is prudent to include directions in his or her Will naming a successor subscriber (if the RESP is to be continued), and how the RESP is to be dealt with (e.g., how the RESP will be funded and invested, whether there are to be limits on withdrawals, etc.). It is also prudent for joint subscribers to agree on how the RESP is to be dealt with on the second of their deaths and whether they wish to have mirror RESP clauses in both of their Wills.
If the RESP is not subject to a specific direction in the Will or there is no Will, an executor will have to make some difficult and complicated decisions respecting whether the RESP can be maintained or whether the funds in the RESP must otherwise form part of the residue of the Estate. For a thorough discussion respecting options for an executor dealing with an RESP where no direction is provided in a Will, I suggest Anne Werker’s article “Death, Taxes and Registered Education Savings Plans” (Hull & Hull Probater, May 2004).
Thanks for reading,
Saman M. Jaffery