As you plan for the birth of your child, you may find yourself wondering what life will be like for them when they get older. While it might seem early to be thinking about college or university, ensuring a child has access to a good education will give them the best possible start in life. Consider these quick facts about the benefits of post-secondary education from Statistics Canada:
Canada’s future labour market will have a preference for skilled workers in a global, technologically advanced economy
College and university graduates are already more likely to have a full-time job, and more likely to keep it during an economic downturn
The average cost of post-secondary averages over $66,000 for a four year program (including housing).
Registered Education Savings Plan (RESP)
One of the best ways to save for your child’s future education is through a Registered Education Savings Plan (RESP). While you save, the government will kick in up to $7,200 through the Canada Education Savings Grant (CESG). The CESG represents 20% of the first $2,500 of annual contributions paid into an RESP for a child under 18 who is a Canadian resident. The maximum annual CESG payment is $500 per child. Taking advantage of this free money can go a long way to finance your child’s education down the road. Putting aside even small amounts each month will translate into substantial savings later on. When your child does attend a post-secondary institute, all your contributions are passed on to them tax-free and taxes are only paid on the investment growth and grants (usually at a much lower tax rate).
British Columbia Training and Education Savings Grant (BCTESG)
Children of BC residents are eligible for the BC Training and Education Savings Grant (BCTESG). This is a provincial incentive designed to help families save for their children’s post-secondary education. The BCTESG is a $1,200 one-time grant to eligible children born on or after January 1, 2007. When an eligible child turns six years old, the subscriber may be able to apply for the grant.
Time Is On Your Side
By boosting your contributions in the early years, you can take advantage of the power of compounding from more aggressive investment strategies. RESPs are quick to set up and combined contributions of up to $50,000 can be made by parents, grandparents, other relatives and family friends.
A summary of the most recent rules and details about RESPs is available on the Services Canada website. There are also some rather specific rules that may come into play. Your advisor should be contacted when you are ready to establish your RESP. There are a number of decisions that need to be made such as the best type of investment(s) to put in the RESP as well as how you would like to make your contributions, which could be a lump sum or ongoing payments.
As discussed above, RESPs are an excellent savings vehicle for your child’s post-secondary education. However, the amount you can contribute and the amount eligible for the CESGs are limited. Given the steady increases in post-secondary educational costs, you may want to contribute more, which will require non-registered savings. You could certainly set up an account dedicated to education savings and your advisor can explain the sort of alternatives that may be right for you.
The Tax Free Savings Account (TFSA)
The TFSA will allow taxpayers 18 and over to contribute up to $6,000 per year (as of 2019) into the account where any income earned will grow tax free and funds may be withdrawn with no tax implications. The range of investments available is essentially the same as provided with an RRSP. The major difference between the TFSA and an RRSP is that there is no deduction allowed for a TFSA. Although an RESP is preferable due to the government grants provided, if you would like to save funds above and beyond the RESP grant limits, the TFSA should be an attractive option.
In Trust For Accounts (ITFS)
These are investment accounts set up for a minor child, typically by a parent, in anticipation of the child taking control of the assets when they reach the age of majority, ordinarily age 18. Even though these are usually structured as ‘informal’ trusts without the same amount of documentation as a formal trust, the courts have held that they are in fact trusts and that the assets belong to the beneficiary (your child). Any income earned on the account (dividends and interest) will be attributed back to you as the contributor, whereas any capital gains will usually be attributed to the child. Prior to the introduction of the Canada Education Savings Grants (CESGs), in trust accounts were a fairly popular alternative to RESPs due to their flexibility. However, now that the CESGs are available it is usually more beneficial to establish and make contributions to an RESP. In cases where contributions hit the $50,000 maximum for RESPs, in trust accounts would certainly be an option worth considering.
Contact our office for additional information about how you can save for your children's education.