News & Notices

There’s more than one way to pay for your kids’ education - by Tim Weichel

Posted: September 22, 2014

The RESP
Most Canadian families start with an RESP, which has a hard-to-beat advantage in the form of a top up to your contributions from Ottawa – 20% for the first $2500 you put in the plan during the years before your child turns 18.
An often-cited downside to an RESP is what happens if a child doesn’t opt to go to college or university. But the rules governing that savings program have that eventuality covered. You can move the cash to an RESP held in the name of a sibling.
You also have the option to transfer up to $50,000 to your RRSP, provided you leave enough room to absorb those funds without triggering tax obligations. Start leaving some RRSP room once your child turns 14 to provide a buffer against any change in plans.

If you are a business owner
Being a business owner gives you some advantages when it comes to saving for university. Owning a company means you can pay your kids to work for you. Up to $10,000 a year is tax-exempted income.
You also have the option to create employee scholarship plans. One catch: it only applies if you own 50% or less of the company, and they’re restricted to smaller businesses. If you’re eligible, the company can pay a tax-deductible scholarship directly to your children or those of other employees. Since the scholarship isn’t paid to the employee, it’s not considered a taxable benefit.

Tax Free Savings Accounts and other creative education funding solutions
If you’re particularly concerned about maintaining liquidity, there are savings options such as TFSAs. A concern raised about TFSAs is that unless you specifically earmark the funds for education, there will be temptations to dip into them for emergencies. It’s a legitimate concern, but rising tuition and living costs, and an increased likelihood of attending graduate school, suggests parents should have a secondary funding vehicle for education costs. A TFSA fits that requirement nicely. If you’re certain your child’s university bound, maximize RESP contributions first and then put any remaining funds into a TFSA. A TFSA can come out ahead of an RRSP if you have serious doubts about a child pursuing higher education, there are no siblings to whom the money can be transferred, and you and your spouse have no RRSP room to accept any unused funds. There are also some interesting alternatives to registered accounts like RESPs or TFSAs:

• In Trust For (ITF) accounts are available to parents and let them invest in equities. You’d be taxed on the interest income, but not on the capital gains because those can be taxed in the child’s name. Although ITFs don’t provide the grant advantage of an RESP, they are completely flexible.

• Buying an investment property can dovetail well for parents who like to put their in some sweat equity, or have a good enough idea where their child will attend school to allow them to buy a property there. Before your child leaves for university, the property can generate income through rental to other students. Your child also could be paid reasonable income to help manage the property; but ensure you account for his or her basic personal exemption of about $10,000 and other deductible school expenses.

• Don’t overlook the Canada Child Tax Benefit (CCTB). This money, usually paid to parents as a tax benefit, technically belongs to the child and can be invested to compound tax-free in your child’s name. The money could also grow in an ITF account.

For more information contact Tim Weichel, MBA - Life, Health and Wealth consultant at 705-798-0062 or tim@retireonyourterms.ca