Many people are aware of the fact that under the Bankruptcy and Insolvency Act (BIA), money held in trust for another person is considered exempt property and therefore safe from creditors. However, it may come as a surprise to some to learn that Registered Education Savings Plans (RESPs) are not considered trusts and would therefore be lost and distributed to creditors upon bankruptcy.
RESPs are created by the Government of Canada to assist in saving for post-secondary education. RESPs offer tax-free growth while the money is inside the plan. In addition, certain government grants called the Canada Education Savings Grant (CESG) and the Canada Learning Bond are only available if an RESP is opened. To learn more about RESPs in general, click here.
RESPs are not considered trusts because it is an investment of capital made in the parent’s name with the intent of it going to the child if and when they attend a post secondary institute. It does not become the child’s money until they attend post secondary school and it can be collapsed at any time by the parent prior to that point.
Another option for saving for a child’s future is to create a trust or an “in trust for” (ITF) account whereby the parent or other adult would manage the investments on behalf of the minor. There are generally no restrictions for how or when the funds may be withdrawn and spent. As stated above, monies held in trust for another person are considered exempt property under the BIA. However, in most cases the child would be able to demand payment of the capital of the trust upon reaching the age of 18.
Apart from the consequences of a bankruptcy, there are many other important differences between RESPs and ITFs including control, ownership, flexibility, grant availability and taxation. A financial advisor should be consulted prior to making any decisions with respect to these types of investments.
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