RESP vs. 529 Plan: Cross-Border Education Savings

As the cost of post-secondary education continues to rise on both sides of the Canada–U.S. border, families with cross-border ties face unique challenges when planning how to save. Registered Education Savings Plans (RESPs) and 529 plans each offer attractive tax benefits, but crossing the Canada-U.S. border adds layers of complexity to managing, reporting, and optimizing these savings vehicles.  Understanding the implications of each plan and how they interact with cross-border tax rules is essential to making informed, strategic decisions.

Education Costs: Canada vs. the U.S.

In Canada, post-secondary education remains relatively affordable. The average annual tuition for undergraduate programs is approximately $6,580 CAD for domestic students (roughly $4,880 USD), and total annual costs—including housing and supplies—reach around $20,000 CAD ($4,830 USD). By 2025, the cost of a four-year degree is projected to climb to $101,319 CAD.

By contrast, the U.S. presents a wider range. In-state students at public universities pay an average of $9,750 USD in tuition, while out-of-state students face about $28,386 USD. At private nonprofit institutions, tuition averages $38,421 USD, with total annual costs often exceeding $58,000 USD. These financial realities make education savings essential—and understanding the tools available even more critical.

RESPs: Designed for Canadians, Risky for U.S. Persons

The RESP is a Canadian government-sponsored account allowing up to $50,000 CAD in contributions per child, with tax-deferred growth and access to the Canada Education Savings Grant (CESG)—a 20% matching grant on the first $2,500 CAD contributed annually, up to a lifetime maximum of $7,200 CAD. Additional provincial incentives are also available in B.C. and Quebec.

Withdrawals used for education are taxed in the hands of the student (only on the grant and growth portion), who typically pays little or no tax due to low income. However, for U.S. persons—citizens or residents—the RESP can present some serious tax challenges.

Cross-border families must consider various scenarios: What if the RESP subscriber moves to the U.S.? What if the beneficiary becomes a U.S. person? What happens if a U.S. spouse inherits an RESP? Each situation introduces complications—foreign trust designations, double taxation risks, and stringent reporting obligations such as FBAR and FATCA.

Additionally, investment income within the RESP must be reported annually and may be subject to U.S. tax as there is no protection for RESPs under the Canada-US tax treaty. If the RESP holds mutual funds, ETFs, or REITs, they may fall under Passive Foreign Investment Company (PFIC) rules, which are punitive and complex. Even CESG grants may be considered taxable income in the U.S., creating risks of double taxation. The double taxation risks are heightened because the U.S. sees the subscribers (typically the parents) as owners of the plan for tax purposes, while Canada taxes the child, as mentioned previously.

529 Plans: U.S. Simplicity, Canadian Complexity

The U.S. 529 Plan allows tax-free growth and tax-free withdrawals for qualified education expenses. While contributions are made with after-tax dollars, some states offer tax deductions or credits. These plans are straightforward for U.S. residents and require minimal IRS reporting.

However, 529s are not recognized as tax-advantaged in Canada. Canadian residents contributing to a 529 must report the income and capital gains on their Canadian tax returns, negating the U.S. tax benefits. Additional foreign asset reporting may apply.

Canadian grandparents looking to support a U.S.-based grandchild may consider gifting funds to an adult child to open a 529. While this can be a practical workaround, they must be mindful of Canadian gift tax considerations and potential U.S. gift tax reporting if limits are exceeded.

Key Considerations for Cross-Border Families

For families navigating these complex rules, here are a few key points to consider:

• Where You Reside Matters: Your tax residency (not just citizenship) plays a significant role in how either plan is taxed and reported.
• Who the Beneficiaries and Account Holders Are: Different tax consequences arise depending on whether the plan holder or the beneficiary is a U.S. person.
• Double Reporting Requirements: Be aware of annual filing obligations in both countries—failing to comply can lead to penalties.
• Tax Mismatch Risks: Income that is tax-deferred in one country may be taxable in the other, potentially eroding your savings.

For example, if an RESP subscriber becomes a U.S. resident, or a U.S. person inherits an RESP, extensive U.S. tax filings may apply. Similarly, a Canadian-resident holding a 529 plan faces annual Canadian taxation on growth—potentially defeating its purpose.

Families may opt for non-registered accounts to avoid foreign trust complications, although it may be with an added cost of annual taxation. Others may choose to gift funds to a trusted U.S.-based individual to establish a 529 plan while retaining alignment with U.S. tax rules. In either case, proactive structuring is key.

Planning with Purpose

There is no universal answer. While both RESPs and 529 plans offer unique advantages, they are not interchangeable, and they certainly don’t operate seamlessly across borders. Families with U.S. and Canadian ties must be cautious about how and where they save for education, taking both countries’ tax laws and reporting requirements into account.

Need Guidance?

MCA Cross Border Advisors helps families like yours make smart, compliant decisions with confidence. From tax rules to inheritance planning, we’ll help you get it right the first time.