RESPs: How to Divide During a Divorce
Saving for your children’s post-secondary schooling is a very important financial decision for parents to make. Upon having children, many couples opt to open an RESP (Registered Education Savings Plan) or order to manage these funds and prepare for the high costs of post-secondary education. If you and your partner are separating, it is a good idea to discuss what you will do with your RESPs to ensure your children still benefit from these funds.
How Are RESPs Used For Children’s Education After A Divorce
In most situations, parties include a clause in their Separation Agreement stating that they will use the funds in their RESP towards the children’s education and living expenses while they pursue post-secondary education in their first degree. But, in the event that these funds are not sufficient to cover the Children’s post-secondary expenses then the parties will share the children’s post-secondary educational expenses as agreed between them, having regard to the financial circumstances of the parties at the time, the availability of other sources of funding such as student loans, scholarships and the children’s ability to contribute to their own education. However, if the children do not attend post-secondary, this can cause some issues of what to do with the funds in the RESP.
What If Children Do Not Attend Post-Secondary Education
If funds in an RESP are not used for the children’s education, for whatever reason, the RESP may be closed and the funds from the plan will be returned to the plan contributors or the beneficiaries. Income earned on the contributions are taxable in the hands of the contributor. Unused Government contributions and income earned on those contributions go back to the Government. It is also important to note that RESPs can remain open for 35 years, so if you are unsure about your child’s future at the time of divorce, you do have some flexibility. You may also add beneficiaries in the future should you have another child.
Case Law Regarding RESPs in Canada
Generally, in Alberta the case law indicates that RESPs are not family property and should be treated as funds held in trust for the beneficiaries. As such, it is common to see any remaining balance left in the RESP after the children graduate post-secondary be divided between the beneficiaries such as the result in Delorme v Delorme, 2017 ABQB 699. With respect to utilizing the available RESP funds, the recent case, VLG v WAJ, 2020 ABQB 105 states that, “any payments for tuition, books and supplies (including computer equipment if needed) shall be made firstly from the RESPS so as to maximize withdrawals and then shall be shared by the parties equally”. It is obvious from the case law that RESPs are for the benefit of the child and should not be regarded as property during divorce negotiations.