Personal Bankruptcy and Registered Education Saving Plans (RESP)

Posted in Personal Bankruptcy
Posted by Scott Schaefer, CPA, CA, CIRP - LIT

bankruptcy-respsAre RESP’s lost in a bankruptcy? Unless an asset is exempt, you are required to surrender your assets to the trustee when you go bankrupt. Since an RESP is not an exempt asset, RESPs are surrendered in a 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.

If I go bankrupt, why do I lose the RESP for my children?

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 is 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.

Options to protect your RESP

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.
  • If a consumer proposal is filed, the RESP will not be affected.

To discuss your situation in detail, please contact us or call us at 1-866-747-0660.

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