Thursday, October 21, 2010

RESP as a Weapon!

A big part of the work I do professionally involves thinking about how to get around security measures and how to use things for unintended purposes. An idea related to RESPs came to mind.

As I often do, I’ll explain my idea in story form:

Ken is a well-to-do homeowner who recently had new neighbours Ted and Alice move in next door. Ken is an RESP expert and the subject came up the first time he spoke to Ted. Ted and Alice saw the benefits of an RESP and they opened one for their baby daughter Emily with some advice from Ken.

The relationship between the neighbours later soured. Their squabbling escalated to the point where they were calling bylaw officers on each other for minor breaches of local ordinances.

In a spiteful mood, Ken concocted a little plan. He opened an RESP in Emily’s name and deposited the lifetime maximum of $50,000 in a single deposit. Ted and Alice hadn’t made a deposit in their RESP yet and now they would never be able to. Anything over the lifetime $50,000 limit gets hit with a 1% per month penalty tax.

Ken planned to leave the money in the RESP for 30 years and then withdraw it and pay tax on the gains. Of course, Ken had no intention of using the money for Emily’s education.

Ken will have to pay an extra 20% tax penalty on the gains when he withdraws the money but this will be partially offset by 30 years of tax-free growth. Because Ken has maxed out his RRSP and TFSA room, the RESP tax shelter is welcome. The extra 20% tax is just the price of revenge.

The question here is whether this could work. Ken would need to get Emily’s Social Insurance Number. The details of my story make it plausible that he would have seen Emily’s SIN when helping Ted and Alice open their RESP. Because Ken has no intention of applying for government RESP grant money, he avoids the need for other documentation about Emily.

Could this work? I’m hoping that the answer is no, but I see nothing in the RESP rules that prevents it. It may not work for certain institutions that offer RESPs, but Ken only has to find one where it will work.

9 comments:

  1. Oh, the drama! I wonder what will happen next?

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  2. It's a denial of service attack!

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  3. @Anonymous: Not much happened next. This is Canada after all.

    @Patrick: Good analogy.

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  4. But what happens when Emily tries to use the funds for her education? Ted can't stop the withdrawal, can he?

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  5. @Nate: Under the RESP rules, Emily has no authority over the money even though she is the beneficiary. The money belongs to Ken until he gives it away. If he gives it to Emily for her education, then he will get favourable tax treatment, but he can just keep the money and pay the penalty taxes.

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  6. Interesting scenario.

    I don't see why it wouldn't work. He'd need her birthday as well.

    I suspect if this really happened, the parents would try to get the HRSDC to reject the neighbours RESP account.

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  7. In this example, would the parents even be able to find out who opened the RESP against their daughter? (assuming Ken never said anything) I didn't think that banks would just hand out account details like that??

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  8. @Mike: It would be interesting to find out whether such an appeal to HRSDC is likely to work.

    @Chris B: Good point. I suppose it might make sense to make an exception in this case, but it seems unlikely that a bank would willingly give up an account holder's name to some other individual.

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