The arrival of a new child or grandchild gets everyone thinking ahead. What if you are not there to support your child? How will you pay for university? What tools can you use to save for a child or grandchild.
Get insurance and financial advice
In deciding on a savings program for your child, first make sure your own will, financial planning and life insurance coverage is in order. Your first priority should be to have a plan in place if you die before your child is an adult. See Is Term Insurance Enough and Insure Stay-at-home Parent.
Next meet with a qualified financial advisor who is a member of the Financial Advisors Association of Canada. Answer the basic questions: What do I want to achieve? How much can I afford? Am I looking for something tax effective, safe or with long-term growth? Am I looking for educational funding or savings of a more general nature?
Insurance and trusts
There are many tools to help you save for your child, but the right fit will depend on the answers to these and other questions. It always pays to start early - time gives your child's money an opportunity to grow. Exempt life insurance is one way to save in your child's name. This is life insurance that allows you to save extra in a tax-sheltered investment. See Income Tax and Life Insurance Products.
You can create a trust fund, with specific instructions on how your child will access the money. If you intend to have your child attend a private school, a trust fund can be set up to withdraw money annually for the school.
You can also save with an "in-trust" account. The rules on in-trust accounts make interest or dividends taxable in the hands of the donor. But the money is set aside in the child’s name for any purpose they choose, not just for education. There are many investment options, from investment funds and savings bonds, to stocks and term certificates.
If you put growth mutual funds in an in-trust account in your child’s name, you pay tax annually on any interest or dividends earned by that investment. But capital gains grow tax-free, and the child pays tax on the capital gain when she withdraws it.
Think about where your child will be in 18 years time. Many children do not go on to a Canadian university. Perhaps that money could be used to pay for her wedding, put him through a U.S. university, help her start a business or help him buy a home. In-trust money can be used for whatever purpose the child chooses when they reach age of majority.
Registered Education Savings Plans (RESP)
A Registered Education Savings Plan (RESP), which sets money aside specifically for your child’s education, is an attractive savings vehicle because of the generous government contribution made every year you put money into the account. Both parents and grandparents can open an RESP.
Like an RRSP, an RESP is a tax-deferred savings tool, but only the tax on the earnings in the plan is deferred. The student will pay tax on the income when it is withdrawn. Students are usually assessed at a modest tax rate since they are low or no income earners.
As of 2007, there is no annual limit for contributions to RESPs. The lifetime limit on the amounts that can be contributed to all RESPs for each beneficiary is $50,000.
No matter what your family income is, HRSDC pays a basic CESG (Canada Education Savings Grant) of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.
HRSDC will also pay an additional CESG amount for each qualifying beneficiary. The additional amount is based on your net family income and can change over time as your net family income changes.
For 2010, the additional CESG rate on the first $500 contributed to an RESP for a beneficiary who is a child under 18 years of age is:
- 40% (extra 20% on the first $500), if the child’s family has qualifying net income for the year of $40,970 or less; and
- 30% (extra 10% on the first $500), if the child’s family has qualifying net income for the year that is more than $40,970 but is less than $81,941
The qualifying net income of the child’s family for a year will generally be the same as the income used to determine eligibility for the Canada Child Tax Benefit (CCTB). Beneficiaries qualify for a grant on the contributions made on their behalf up to the end of the calendar year in which they turn 17 years of age.
Canada Learning Bond (CLB)
Human Resources and Skills Development Canada (HRSDC) provides an additional incentive of up to $2,000 to help modest-income families start saving early for their child's education after high school (post-secondary education). The CLB money will be deposited directly into the child's RESP.
For families entitled to the National Child Benefit (NCB) supplement for their child, the CLB will provide an initial $500 to children born on or after January 1, 2004. To help cover the cost of opening an RESP for the child, HRSDC will pay an extra $25 with the first $500 bond. Thereafter, the CLB will also pay an additional $100 annually for up to 15 years for each year the family is entitled to the NCB supplement for the child.
If the beneficiary does not pursue post-secondary education, the CLB is returned to the government.
Income earned by the plan must be used for a child's post-secondary education at an accredited Canadian college or university. But investors no longer need lose their earnings when a child doesn’t choose university. Now the money can be rolled over to another child or adult persuing higher education, or into an RRSP if the contributor has RRSP room.
If you have more than one child or grandchild, you can put them all under one family plan. This is easier for you to monitor. And it makes it simple to roll the investment to a second child in the plan if the first chooses not to go to university.
You may not be able to put the full amount aside, but a few dollars a month will make a big difference, especially if you start early. Consider saving $25 or $50 a month. You can invest this in mutual funds, bonds, term deposits or in a mix of investments with the RESPs offered by some institutions. Ask about fees. Your Advocis advisor can help you select something appropriate for your family.
Whatever investment you choose, you must plan for inflation. Tuition is rising throughout Canada, so your RESP has to grow. Don’t put it in a GIC that will grow more slowly than inflation. If you have more than five years before your child goes on to college, consider a high proportion of equity or growth funds. There are no limits for foreign content in an RESP as there are in an RRSP so you can buy international mutual funds. As your child gets closer to high school graduation, seek financial advice about moving the money into more conservative investments.