Are RESP’s lost in a bankruptcy in Ontario? One of the consequences of filing bankruptcy is that unless an asset is exempt in a bankruptcy, you are required to surrender your assets to the trustee when you go bankrupt. In Ontario, an RESP is not an exempt asset so technically RESPs are an asset that must be realized in a bankruptcy. There are however options to keep your RESP, even if you file bankruptcy.
What is an RESP?
An RESP is a registered savings plan for a child’s future education. A plan-holder makes contributions to the plan and the government will match 20% of the contribution, up to certain limits. This asset then grows and when the child withdraws the funds for educational purposes, the child is taxed on the growth. The plan-holder remains in control of the plan and may have it collapsed – net of any government contributions that are subsequently lost.
What happens to my RESP in a bankruptcy?
An RESP is generally held not to be a true trust, and is cashable by the plan-holder. Because the plan holder (usually the parent) can cash out the RESP at any time, the RESP is considered to be an asset of the plan-holder. Therefore, if the plan-holder is bankrupt, the RESP can be seized by the Trustee.
How are the costs to collapse an RESP handled in a bankruptcy?
When a trustee cashes in an RESP, there are usually plan administration fees to pay, and all government contributions are returned to the government, so the money that the trustee receives is generally far less than the value of the RESP if it is not collapsed.
Read our article on other registered savings accounts for information on how RRSPs, DPSPs, TFSAs and other registered savings vehicles are treated in a bankruptcy.
Options to protect your RESP in a Bankruptcy
If you are in financial difficulty and have an RESP that you want to protect, there are options.
- In a bankruptcy situation, the RESP can be repurchased from the trustee. The cost is added to your monthly payments.
- If a consumer proposal is filed, the RESP will not be affected. This is because in a consumer proposal you keep all assets, which includes any RESP funds.
As you can see it is possible to keep your RESP for your children’s benefit along with other assets and still be able to obtain debt relief. To discuss your situation in detail, please contact us for options to preserve your RESP investment.