TAXFlash News from IncomeTaxCanada.net

Jim Maroney

:: Back-to-School costs escalate for university and college … RESP may be the best answer

:: This being the last day of August, back-to-school will be foremost in the thoughts of many families this weekend. At the risk of dating myself, in my public school days, getting ready for back-to-school wasn’t a big deal. Beyond glue and scissors, the “school” provided virtually all the basic supplies that were necessary including, pencils, erasers and even the paper for writing on.

Ah, those were the good old days weren’t they? Nowadays, the ever-expanding school supply list can include everything from paper for the photocopier to earthquake preparedness kits to say nothing of your child’s dreams of $150 runners and $200 jeans.

But what if back-to-school means sending junior to a post-secondary institution? Try adding on tuition fees, textbooks, parking, student fees and maybe even living expenses and then see how expensive things can get. How can parents expect to cope?

One of the options available to assist parents (and grandparents) in financing post-secondary education is the registered education savings plan (RESP). In general, the benefits of an RESP are poorly understood so here are ten reasons why RESPs are worth a thought or two and the sooner the better:

1. RESPs are tax-effective. If you take two identical investments – one held outside an RESP and the other held inside an RESP – the RESP will result in an equal or larger pool of funds every time. The reason for this is simple – income earned on investments inside an RESP is tax-deferred which means you don’t have to pay tax on the income earned by the investment until funds are withdrawn. This benefit is not available to non-RESP investments where income is taxed when earned or realized.

2. RESPs are income-splitting tools. Not only is the income earned by an RESP tax-deferred but eligible withdrawals are taxable to the beneficiary of the RESP and not the contributor. That’s spells income splitting – sanctioned by our federal government no less. Oftentimes, being a student, the beneficiary has little or no income in contrast to the RESP contributor who is likely in the middle or high tax bracket. The end result is an honest tax saving (yes, there is such a thing!) because RESP income is being taxed at a lower rate than would otherwise be the case.

3. RESPs are flexible. There was a time when investment advisors shunned RESPs because they were viewed as too restrictive. In the early days, failure of the RESP beneficiaries to pursue a post-secondary education could cause the forfeiture of all the plan income earned over the years, returning only the original capital to the subscriber (i.e., the person who set up the RESP). This meant that the original capital contributed to the RESP earned absolutely no return and, in fact, lost purchasing power, during the life of the plan – not a good situation. Recent rule changes have mitigated this situation somewhat by allowing RESP subscribers to transfer up to $50,000 of RESP income to the subscriber’s RRSP (or their spouse’s RRSP) during their lifetime.

4. Still on the subject of flexibility, RESP rules contain provisions that allow substitution of minor siblings as beneficiaries to the plan. Since RESPs can exist for as long as 25-years, this reduces the need for those setting up an RESP to guess whether or not a chosen beneficiary will attend post-secondary thereby increasing the likelihood that at least one of the potential beneficiaries will take advantage of the plan.

5. RESP eligible investments abound. Bonds, T-bills, term deposits, mortgages, publicly-traded stocks and mutual funds are all eligible investments under the RESP rules. In fact, the types of investments an RESP can hold are more or less the same as those eligible under the RRSP rules. If you understand RRSP investing, then you understand RESP investing.

6. If you’re a control-type personality, RESPs can be self-directed allowing you to take the helm and run the show all on your own.

7. RESPs are not subject to a limit on foreign content. Unlike RRSPs where foreign content is restricted, there is no foreign content limit for RESPs.

8. RESPs are eligible for a federal government handout known as the Canada Education Savings Grant (CESG). The CESG is a program whereby the federal government will provide a grant to an RESP equal to 20 per cent of the first $2,000 contributed to an RESP each year that the beneficiary is 17 years of age or less. At its maximum, the CESG will add $400 to an RESP each year or a maximum of $7,200 (18 x $400 per year) until the year the beneficiary turns 18. Think about it – that’s potentially over $7,000 per child of “free” money and it’s available to every Tom, Dick and Harry regardless of income level or social status. In my mind, the CESG is the proverbial straw that broke the camel’s back.

9. Time isn’t on your side if you want to maximize your RESP. You’re not getting any younger and neither are your kids. The annual limit for RESP contributions is $4,000 with an overall limit of $42,000. This means it will take more than 10 years to reach the maximum RESP limit assuming you can afford to set aside $4,000 per year. Start sooner and smaller annual contributions will do the trick.

10. On a similar note, it’s use-it-or-lose-it where RESP contributions are concerned. If you contribute less than the $4,000 annual limit in a given year, there is no catch-up provision to enable you to make up the difference in a future year.

Not surprisingly, the recent lifting of our provincial tuition freeze has triggered a significant increase in tuition fees. The cost of a post-secondary education is headed nowhere but up – don’t ignore RESPs as part of the solution.

...for more Canadian Tax Information

---

Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca
Canada Revenue Agency (CRA) / l'Agence du revenu du Canada (ARC) offers bilingual information on its website for
NetFile, deductions (benefits - credits), interpretation bulletins, income tax forms (returns) and tax tables (brackets).

Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com.