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Your child’s education: RESP or informal in-trust? Both!

University of Toronto estimates that one year of university costs $19,000, or
$134,000 for a four year degree. Statistics Canada estimates the future cost
(assuming conservative inflation) at almost $175,000. For most families, putting this money aside will take some planning. In recent years, it’s not just parents who contribute. Education funding has become a family affair.

Beyond the RESP
If you’re thinking about funneling education savings into a Registered Education Savings Plan (RESP), you may want to think again. Don’t get me wrong—contributing to an RESP is a great start. However, for contributions over and above the Canadian Education Savings Grant
(CESG) levels, I advise my clients to use an informal in-trust account. Informal in-trust accounts offer more flexibility than an RESP. Plus, they are a practical alternative for grandparents, aunts and uncles who wish to contribute as well.

RESP advantages
An RESP has valuable tax features:

  • Your contributions are not tax deductible. However, for every dollar you contribute, the government will give you a CESG of 20% (up to certain limits).
  • While inside the plan, the growth on your investments is tax-sheltered similar to an RRSP.
  • When money is withdrawn as education assistance payments, the growth is taxed to the student beneficiary, rather than the (presumed) higher tax rate contributor.

RESP disadvantages
While there are advantages to using an RESP, there are also disadvantages. If your child decides not to attend a post-secondary institution, and you choose to withdraw the funds, the CESG money must be returned, and the contributor may be taxed on the growth. While there are other options depending on how your RESP is set up, learning more about how RESP’s work today will avoid unpleasant surprises in the future.

What’s on your mind?

  • Does Basic CESG room accumulate for every child, even if an RESP does not exist?
  • Can I set up more than one beneficiary for an RESP?
  • If one child doesn’t go to school, are the amounts transferable?

The answer: YES

Informal in-trust adds flexibility
Unlike RESP’s, an informal in-trust has fewer restrictions, and more flexibility. At the age of majority, the child is entitled to claim the trust assets, and can use the money as he or she pleases. In addition:

  • Informal in-trust accounts cost nothing to set up
  • There is no minimum or maximum in-vestment
  • There are few restrictions on the types of investments held, and
  • Dividends and interest payments are attributed to the contributor; capital gains, to the child.

Caution: make sure you get good advice during set up. Depending on the types of investments made, the contributor may have to pay the taxes.

Never too late to start
RESP’s have a great feature which accelerate your savings. For each child, unused basic CESG grant room can be carried forward. Simply, this means that you can double up by contributing $5,000 and receiving up to $1,000 in CESG annually for each child, up to the lifetime limits. With an informal in-trust, there are no restrictions on the amount you are al-lowed to invest.

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