“The foundation of every state is the education of its youth.” – Diogenes
Although taxes are higher and winters are colder, Canada has many qualities that attract more and more US citizens and their families north of the 49th parallel – stricter gun laws and free health care, to name two. However, one challenge young families face when they move from the US to Canada is what to do with their education savings plans.
Introduction to 529 Plans
A 529 plan is a tax-advantaged savings plan in the US sponsored by states, state agencies, or educational institutions. In the US, contributions to 529 plans are after-tax (there is no federal deduction on contributions), and the earnings within the plans are not included in US federal gross income provided the contributions and earnings are used for qualified higher education purposes.
Issues With 529 Plans for US Citizens Living in Canada
The cross-border complication for US citizens living in Canada is that when the contributor to a 529 plan is a Canadian resident, the plan is potentially considered a deemed resident trust for Canadian tax purposes. Thus, any annual income derived from a 529 plan is taxable in Canada, similar to a regular non-registered investment account. Since Canada does not recognize the US’s tax-free treatment of 529 plans, a cross-border tax mismatch results.
Transferring Ownership of 529 Plans
In order to maintain the tax-free status of your 529 plan upon establishing Canadian residency, consider transferring ownership of the account to a US resident family member while you reside in Canada. This is an effective way to allow your 529 plan to continue to grow and preserve its tax-deferred status. You can continue contributing to the 529 plan with the same gifting restrictions you were subject to as a US resident. Please note, when transferring ownership of a 529 plan, you are relinquishing control over the account, so ensure the new owner is someone you can trust.
Unfortunately, opening an RESP upon establishing Canadian residency is not necessarily the best approach to your education planning needs as the IRS considers an RESP akin to a foreign trust, which negates the tax-deferred nature of the account on the US side of the border.
To discuss your options regarding your 529 plan or for guidance on any other cross-border issues, please do not hesitate to contact us.
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MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.