Managing Your Money

Children’s education – Have you started saving?

If you have children and are looking toward the future and their education needs you will realize that the cost of education has been increasing over the years, and it’s not going to get any better. If you are concerned about whether your children will be able to afford to go to college or university and would like to help your children obtain an education without amassing a significant amount of debt, a plan needs to be put into place early on to start saving for their education.

There are different ways you can save for your children’s education. You can save by setting up a regular savings account, setting up an unregistered investment account, using a tax free savings account (as discussed in Daryl Heinsohn’s article from last week), and lastly you can use a Registered Education Savings Plan (RESP). An RESP is a dedicated savings plan to be used to save for children’s education and can be an effective way to save because it offers tax benefits and allows you to take advantage of federal government grants.

Here’s how RESPs work:

1. You can usually put money in whenever you want, up to a lifetime maximum of $50,000 per child.

2. The contributions are not tax deductible, but you can withdraw them tax free from the plan at any time.

3. Your savings grow tax free. There is no tax on the investment earnings, as long as they stay in the plan.

4. If you are saving for a child under the age of 18, the federal government will also put in some money as a grant or bond. The basic Canada Education Savings Grant (CESG) will top up your annual contribution by 20 percent, up to a maximum of $500 each year for each beneficiary. The lifetime limit for the grant is $7,200. Additional CESG grants of up to 20 percent of your first $500 contribution may be available, depending on your income. In addition, the Canada Learning Bond (CLB) provides an additional grant of up to $2,000 per child to help families with a modest income. You don’t even have to put any of your own money into the plan in order to receive the CLB. If you qualify, you need to have an established RESP and apply for the Bond.

5. You can invest the funds into a variety of investments such as stocks, bonds, mutual funds and GICs. The choice is yours.

6. Your child can withdraw money from the RESP when they enroll in college, university or other qualifying education program such as an apprenticeship. The payments (the interest and government grant portions only) are taxable in the student’s hands. Since most students have little to no other income, they will likely pay little or no tax.

7. If your child does not go on to education after high school, you have a few options depending on your plan. Your plan may allow you to transfer the benefits to another beneficiary. In some cases, you may be able to transfer the earnings to your RRSP. You may also be able to withdraw the earnings accumulated in the plan, but you will need to pay tax on that portion. Any grants would have to be returned to the government, unless you have a family RESP.

Whether you plan to help your children pay for their education or plan to pay for their entire education, RESPs can be an effective way to prepare and save. Although it is best to start early to ease the annual cash flow burden, it really is never too late to start!

Angèle Charbonneau, CPA, CA is a partner with MNP LLP. MNP provides tailored expertise in tax, accounting and a wide range of business advisory services. Whatever your needs, wherever you want to go, MNP will help you get there.

Angèle Charbonneau, CPA, CA