Education Planning

Today, sixty five percent of all jobs available in Canada require a post secondary education. If you’re like most Canadians, the task of planning for a child’s education can be a challenging one. As government funding and grants decrease while post secondary enrolment increases, so too does the cost of a post secondary education in Canada.

Estimating the Cost of a Post Secondary Education

Canada has the third highest tuition cost in the world, second only to Japan and the United States. Today, the average four year education at a Canadian post secondary institution costs between $40,000 and $60,000, and the average growth rate of these costs is 9%. This means that if you or your children are just starting a family, in 18 years time, the cost will between $110,000 and $150,000.

Apart from scholarships, bursaries and grants, which are becoming increasingly scarce, there are other ways to fund your child’s education.

REGISTERED EDUCATION SAVINGS PLANS (RESPS)

Much like RRSPs are the cornerstone of a retirement savings strategy, RESPs form the cornerstone of an education savings strategy. An RESP lets you, the subscriber, contribute up to $4,000 per year toward a child’s education, to a maximum of $42,000 per child, or beneficiary. While there is no tax deduction for these contributions, money inside the RESP does grow tax-free over time. As money is withdrawn for education purposes by the beneficiary, the amount withdrawn is taxed in the hands of the beneficiary, with lower or no tax consequence because of the lower income status of the student.

If the beneficiary does not pursue a post secondary education and the plan is more 10 years old, the plan may be rolled into the subscriber's RRSP, or the accumulated plan value may be paid out to the subscriber subject to tax and a 20 percent penalty.

Types of RESPs

Group Plans vs. Self Directed Plans
RESPs may be group plans or self directed plans. Group plans, or "pooled trust plans", are administered through scholarship trust organizations and will typically pool assets for investment on your behalf in government backed securities only, including T-Bills, GICs, etc. By contrast, self directed plans generally offer more flexibility, allowing you yourself to select from a range of investments, including mutual funds, GICs, and more, thereby increasing the growth potential for assets in the plan.

In addition to offering greater investment selection, self directed plans are generally more flexible in varying the amount and timing of withdrawals for education purposes. In addition, the subscriber has the ability to change, at any time, the name of the beneficiary if a one child decides not to pursue a post secondary education. Group plans will often limit this ability to change beneficiaries.

Finally, self directed RESPs typically apply to a wider range of education programs, whereas most group plans apply only to qualifying programs which are a minimum of two years in duration.

Individual Plans vs. Family Plans
Both self directed and group plans can be broken down into individual plans and family plans, the key differences being that individual plans cannot have more than one beneficiary, whereas family plans can while also allowing for the allocation of accumulated income in proportions according the needs of each named child.

Individual plans do allow for greater flexibility in naming the beneficiary, though. In an individual plan, the beneficiary named does not have to be related to you and can be of any age, whereas in the case of family plans, named beneficiaries must be under age 21 and must be related by blood or adoption.

CANADIAN EDUCATION SAVINGS GRANTS (CESG)

Established by the federal government to encourage early contributions to an RESP, the CESG is paid into the plans of beneficiaries who are resident in Canada. The grant totals 20% of the contribution amount to a maximum of $400 in grants per year, up until the year the beneficiary turns age 17. Similar to RRSP contribution room, grant room not used may be carried forward.

IN - TRUST ACCOUNTS

An in-trust account, or "bare" trust, is an investment or bank account. There are no limits to how much you can invest in an in-trust account, making it a good supplement to RESPs for those who may be getting a later start in the funding of a child’s education.

In-trust accounts also offer the opportunity for income-splitting, since capital gains on withdrawals will be taxed in the hands of the child, often with little or no tax consequence, since the student will typically be at a lower marginal tax rate than you.

In addition to education funding, your child can use the assets from an in-trust account for any purpose once the age of majority is reached. Care must therefore be taken in ensuring assets in the in-trust account are used for their intended purpose.

HOW WE CAN HELP YOU

Planning the funding of your child’s or grandchild’s education has never been more important than it is today. Fortunately, there are several options available to you and your Canfin Financial Advisor can help you determine which options may be right for you, providing you with the peace of mind in knowing that the funding of that education is taken care of. Call your Canfin Financial Advisor today for a complimentary Education Planning consultation.