Feb 19, 2020

Account for RESPs in any separation agreement, or risk getting taught a lesson in court

Separated parents should thoughtfully and carefully plan for a child’s future post-secondary expenses

By Adam N. Black
Special to the National Post View original

Throughout Canada, a divorced parent’s child support obligation includes the sharing of a child’s special or extraordinary expenses. Those expenses, known as “Section 7 expenses” in family law parlance, include, for example, child care, medical expenses and extracurricular activities. Under Section 7 of the Federal Child Support Guidelines, parents share these expenses in proportion to their incomes. For example, if one parent earns $100,000 per year, and the other earns $200,000 per year, Section 7 expenses are shared one-third and two-thirds respectively.

For many families, a child’s post-secondary education is the most significant Section 7 expense. In anticipation of such a large expense, many families choose to invest in a Registered Education Savings Plan, or RESP, in the years prior to the expense being incurred. Generally speaking, contributions to a RESP are made with tax-paid dollars. The government chips in a grant, depending on the size of the contribution. When funds are withdrawn, the student pays tax on the grants and investment income, but not the proportion drawn from the contributions.

For an intact family, the use of funds in an RESP is straightforward. For separated parents, however, the use of RESP savings is more complex, especially with regard to how they affect each parent’s proportionate share of post-secondary expenses.

In December, that question was squarely before Justice Alex Finlayson of the Ontario Court of Justice. Specifically, Justice Finlayson was asked to determine the apportionment of two children’s post-secondary expenses and how to account for the RESPs to which the parents contributed after their separation.

The parents separated in 2005, by which time they had already contributed $16,552 to an RESP for the benefit of their oldest daughter. Pursuant to a separation agreement they signed in January, 2009, the parties were each to contribute $100 per month to an RESP for each child until the maximum contribution was reached. The agreement went on to provide that these funds would be applied off-the-top to the future post-secondary expenses and any unpaid expenses were to be shared by the parties in proportion to their incomes.

The parties did not follow the terms of their separation agreement. Instead, the mother contributed $200 per month to an RESP for the oldest child and the father contributed annual contributions (but not necessarily each year), and top-up payments for the youngest child. According to Justice Finlayson, this “was done, on consent, following a discussion between the parties. This new arrangement was not documented in writing.”

By the time the parties’ oldest daughter started her post-secondary education, the RESP the mother managed had a balance of approximately $85,000. The RESP managed by the father had a balance of approximately $60,000 by the time of the trial, at which time the parties’ second daughter had not yet commenced her post-secondary studies.

The parents disagreed on how the RESP savings would be applied against the children’s university expenses. The dispute made its way to the courtroom. The father took the position that the separation agreement ought to be enforced since the parties’ verbal agreement on how to treat the post-secondary expenses was never put in writing. The mother disagreed, saying “it would be absurd to enforce the separation agreement.”

The mother believed that if the separation agreement was enforced as written and the RESP funds came off-the-top before determining the parties’ proportionate shares of the remaining expense, the father would benefit from the RESP money the mother saved for the oldest daughter. This would have the effect of reducing the father’s contribution to those expenses when only the mother contributed to that plan. Meanwhile, if all funds in the RESP to which the father contributed for the benefit of the youngest daughter were not used, they would be returned to the father and the mother would not enjoy the same benefit.

By the time of the trial, the mother had paid in excess of $35,000 for the oldest daughter’s tuition, residence, fees, other rent and spending money for the 2018-2019 school year, and the first term of the 2019-2020 school year. The mother had used approximately $20,000 from the RESP towards these expenses.

According to Justice Finlayson “there is a timing issue.” The oldest daughter is “already in university, and so the RESP for her that the mother saved is already being used” whereas the youngest daughter “is only in grade 12 and the other RESP has not yet been accessed,” the judge noted.

To resolve the dispute, Justice Finlayson canvassed the law in respect of RESPs as it relates to separated parents. He pointed out that a “RESP is not a section 7 expense. Parents cannot be compelled by Court Order to contribute into one, absent an agreement.” The underpinning of this principle is that the cost of post-secondary education is the Section 7 expense, rather than any steps taken to save for that future expense.

Following a review of decisions of other courts in respect of how RESPs are to be accounted for in the proportionate sharing of post-secondary expenses, Justice Finlayson concluded “the overarching theme in the cases” is that “it is generally fair for a parent to retain the sole benefit of funds he or she has saved, outside of the marriage, for a child’s post-secondary education.”

In the result, Justice Finlayson found that, after applying the pre-separation RESP savings, the parents “may use their respective RESPs according to ownership as each sees fit. That means that the mother shall be entitled to use the funds in the RESP she had established for the oldest daughter to defray her (40 per cent) share of the university expenses if she wishes, and the father shall be entitled to use the funds in his RESP for the youngest daughter to defray his (60 per cent) share if he wishes.” In other words, Justice Finlayson did not “reduce the father’s contribution towards post-secondary expenses to apply only after the mother’s RESP is spent.”

The message is clear: separated parents should thoughtfully and carefully plan for a child’s future post-secondary expenses. Such planning should include how to account for pre- and post-separation savings in a RESP.

This article originally appeared in the National Post.