WEALTH Matters — SUMMER 2011

GET $7,200 in government grants for education

The cost of post-secondary education has risen much faster than inflation in the past 10 years. Tuition alone now costs $3-6,000 a year and living expenses for a student away from home average $6-10,000. These costs place a significant financial burden on families sending their children to get an education.

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Fortunately, every child is eligible to receive $7,200 in government grants toward these costs, and lower income families can get even more. These grants are paid by the government into a Registered Education Savings Plan when a child’s family makes contributions to the plan. Because of the growing awareness of these benefits, annual RESP contributions have grown from $1.6 billion in 1999 to over $3.1billion in 2009. (Human Resources and Skills Development Canada).

Get $7,200 in government Grants for Education

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An RESP is a tax shelter and income-splitting vehicle that shares some of the attributes of RRSPs and TFSAs. While the RESP does not allow for contributions to be deducted from the contributor’s taxable income, it does allow for investment earnings in the plan to accumulate tax free. When these earnings are paid out to the beneficiary to pay for educational expenses, they are taxable in the hands of the beneficiary, not the contributor. Since the beneficiary will likely have very low income while attending college or university, there will likely be little or no tax payable on these earnings when they are withdrawn. This is a huge advantage compared with the contributor investing the capital in their own name and having to pay tax on the investment earnings in their own (higher) tax bracket.

The graph to the right shows the advantage of the tax sheltering and grants. It compares the total value accumulated by age 18 in Open (taxable) and RESP plans, assuming contributions of $2500 per year from age 1 to age 16, and an annual return of 5%.

The advantage is staggering: the RESP has an extra $32,000 available for education – over 50% more money than regular taxable investments!

Many RESP plans that are actively marketed are ‘Scholarship Trusts’ in which the contributor commits to annual contributions until the child is 18, and then the child shares in the benefits with all other members of the trust. These plans are often characterized by high setup costs and lack of flexibility – especially if the child elects not to go on to post-secondary education.

Fortunately, there are many large and respected investment firms offering individual RESP plans that can hold a wide variety of investment types, including cash accounts, GICs and mutual funds. Most of these plans are available without additional fees for the setup and administration of the RESP plan. However, not all plan providers will administer the Canada Learning Bond and Alberta or Quebec amounts available for lower-income households. We maintain a list of providers and what benefits they offer, so that our clients get the maximum benefit.

Sadly, many parents wait too long to set up an RESP for their child, and miss out on most of the benefits. The basic education savings grant is a maximum of $500 per year from age 0 to 17, but you can’t catch up some of the grants unless you had an RESP plan open in the year that the grant would have been payable, or before. That’s why we recommend that every child have an RESP set up in the year they’re born, even if the parents will be unable to contribute much to it. Often grandparents help fund the plan to ensure that the maximum grants and tax-sheltering benefits are realized.

 

If you have a child or grandchild under the age of 16, please call us to ensure you’re getting the most of these benefits.

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