US Cross-Border Tax Blog

Published by W.L. Dueck LLP

Candace Doig

US Education Savings Plans for Residents of Canada

Canada and the US have similar tax laws for education savings plans. Unfortunately, neither recognizes the each other’s plans the same as their own. For example, a US education savings plan, such as a “529 Plan,” has Canadian tax reporting requirements which are not applicable to a Canadian Registered Education Savings Plan.

The  income earned inside a 529 Plan will be subject to Canadian tax if you are resident in Canada. In addition, you must file Canadian tax forms (Form T3, Trust Income Tax and Information Return) and potentially other information forms relating to the foreign investments (Form T1135, Foreign Income Verification Statement). Failure to file Form T3 can result in penalties of 5% of the unpaid tax plus 1% for each full month the return is late, and failure to file Form T1135 can result in a penalty of $2,500.

Scenario:  US Resident Moves to Canada with US 529 Education Savings Plans

A hypothetical example clarifies how Canadian trust income reporting requirements work and what you can do to make sure you manage your affairs to reduce your tax filing requirements (and tax payable).

You are a US resident who has decided to accept a job in Canada. While in the US, like a good parent, you have contributed to a number of US 529 education savings plans for your three children. However, before the move north, you have the foresight to meet with a tax advisor. It’s too early to tell whether your kids will attend university in the US or Canada. You decide that even though the earnings would be taxable in Canada, you want to keep the funds in the US.

Sometimes maintaining future options will outweigh the additional tax burdens. If your children end up wanting to go to college in the US, maintaining your US 529 education savings plans are good investment vehicle to provide for their education. The good news is that it may be possible to consolidate the plans into one plan before your move to Canada.  Having only one US education savings plan greatly reduces your additional filing requirements in Canada.

Your children are a joy and a responsibility. Let our team at WL Dueck help take the stress out of preparing for their future by taking care of the additional tax complexities of your education savings plans .