The RESP and US tax: the government grant is the surprise

The pitch is genuinely good: contribute to a Registered Education Savings Plan and Ottawa adds 20% through the Canada Education Savings Grant, up to $500 a year and $7,200 lifetime per child. Every Canadian financial adviser recommends it. Almost none of them ask whether the subscriber is a US citizen.

Three problems, in ascending order of surprise

The wrapper. Canada defers tax on the growth until the child withdraws it, and then taxes it in the student's hands at a student's rate. The United States mirrors none of that. There is no US provision and no article of the 1980 Convention that makes an RESP tax-deferred, so the income inside is generally the subscriber's income, currently.

The holdings. An RESP is usually invested, and usually in Canadian mutual funds or a bank's education portfolio — non-US pooled vehicles that commonly meet the PFIC tests. Since the wrapper gives no shelter, those raise a Form 8621 question, generally one per fund per year.

The grant. This is the one that catches people. The CESG is a government contribution to the plan, and it is generally treated as income to the US-citizen subscriber in the year it is paid in. The 20% top-up that makes the RESP worth opening is, on the US side, simply more taxable income.

The Form 3520 question

As with the TFSA, the cautious reading treats an RESP as a foreign grantor trust, which raises Form 3520 / 3520-A. Rev. Proc. 2020-17 exempts certain tax-favored foreign non-retirement savings trusts from those forms where conditions on contribution limits and information exchange are met, and an RESP is a plausible candidate — but whether a specific plan qualifies turns on its terms and the year's figures.

What this means in practice

• A non-US-citizen spouse as subscriber is the structure most often discussed, because it moves the plan outside the US filing perimeter — but it is a real decision about ownership and control, not a formality.
• What the plan holds is the part you can change without changing anything else: cash, GICs or US-listed holdings inside the RESP avoid the PFIC layer even though the wrapper still gives no US shelter.
• Reporting continues regardless. The plan is a foreign financial account for the FBAR ($10,000 aggregate) and counts toward Form 8938.

None of this makes the RESP a mistake for a Canadian family. It makes it a plan whose US-side cost should be counted before the grant is treated as free money.