The gift of education
If you are having a tough time thinking of the perfect gift for your children, grandchildren, nieces or nephews, consider a vehicle to provide for their financial future.
Why save for education?
According to Statistics Canada, it is estimated that by 2019, the total cost of a four-year university education will be $74,000 and a three-year college education will total $45,000. This is based on 2001/2002 average costs of $10,400 per year for four years of university and $8,500 per year for three years of college. The price for an equivalent online degree is expected to be lower.” Figures are inflation-adjusted at 3 percent per year through 2019 and include tuition, rent, food, books, and additional fees. This data does not apply to Quebec.
How to save for education
Let’s start by looking at the example of Susie and her daughter Ella.
- Regular savings – Obviously the possibility in terms of saving for a child’s education is just through regular savings. The advantage of this is that there are NO restrictions in terms of minimums, maximums, investment choices, etc. Any investments will be held in the name of Susie and Susie will pay taxes.
- Informal Trusts– The informal trust account is similar to a regular savings account except that it is owned ‘in trust’ by Susie on behalf of Ella. It is considered informal simply because there are no formal trust documents signed. The benefit of an ‘in trust’ account is that some of the tax may be taxable to Ella depending on the type of income the investments produce. This is beneficial because Ella has no income and therefore pays no tax. Any capital gains generated by the investment are taxed in Ella’s Name. However, dividends and capital gains are taxed in Susie’s name. Therefore, the ‘intrust’ account favors growth investments like equities. If you are investing money into an ‘in trust’ account, the deposits are irrevocable. Meaning the funds are owned by Ella. If Susie decides to take the money out and use the funds, she will have to pay the tax on the capital gains. Similar to savings account the money saved can be used for any purpose and not just for education. For Example, Ella could use this money for a myriad of options – to buy a car, travel, down payment on a house, or maybe start a business, etc.
- RESPs – Registered Education Savings Plans have become one of the most popular vehicles to save for education. RESPs differ from the other options in that they must be used for the purpose of education. In fact, there is a list of qualified educational institutions. The main reason for the popularity of RESPs is that the government introduced something called the Canada Education Savings Grant (CESG). The government will invest 20 cents for every dollar invested into the RESP per individual, up to a maximum of $2000 per year. Thus the maximum CESG will be $400 per person per year. The deadline for the deposit is December 31, 2002. The one key stipulation to the CESG is that the child must have a Social Insurance Number (SIN).
- Pooled RESPs – Pooled RESPs are sometimes known as scholarship trusts or education trusts. Contributing to a pooled plan means that you will purchase units into a pool of investors. Typically the pooled programs will only invest in fixed income securities. If Susie were to buy units of these pooled RESPs, she would have no control over the investments. You have to really be careful about the details of these contracts especially under what conditions fees will be charged. According to Perry Quinton, Investor Education Officer of the Ontario Securities Commission, “You can expect to pay enrolment fees, administration and management fees, sales incentive fees, trustee fees, custodian fees, and transaction costs.”
- Formal Trusts – A formal trust differs from an informal trust in that a lawyer must draw up forms for signature. The trust specifies how monies can be invested, who the beneficiaries of the trust are and how the money can be used. The taxation of investments is similar to informal trust. The biggest advantage is the ability to dictate when and how the money can be used. However, Formal Trusts can sometimes be costly to set up compared to the other options.
- RRSPs – The government introduced new legislation that you can withdraw money from your RRSP for the purpose of education. The Lifelong Learning Plan allows an individual to withdraw up to $10,000 per year up to a maximum of $20,000 from the RRSP over a four-year period. The withdrawal must be paid back over a 10-year period otherwise it will be added to your income and then taxed. For more information, you can search the government website www.ccra.gc.ca.
- Life Insurance – Life insurance has always been a traditional tool to invest for a child’s education. Given all of the other options, the popularity of using life insurance for education funds has diminished dramatically.