Independent Advice

An Important Decision  

There are many ways to save for your child�s education. The most common education savings plan is the RESP/CESG (Registered Education Savings Program/Canada Education Savings Grant).  The media consistently portrays the RESP plan, along with the grants offered by it, as the best vehicle to save for your child.  I don�t agree.   

I believe the best way to save for your child�s (children�s) education is via an In-Trust Account.  Although there are no opportunities to earn grants with an In-Trust account, I still prefer them; and here are five good reasons why:

1)  If you�ve saved via a �family� RESP and none of your children decide to pursue secondary education, the contributions were made with after-tax dollars (no deduction was taken), therefore those monies can be returned to the contributor with no tax implications.  As the child is not going to school, any grants received (CESGs) will have to be returned to the government. As far as the tax sheltered income in the plan, provided the plan has been in place for at least 10 years and no beneficiary has attended an eligible educational institution by age 21, the income can be transferred to the contributor. However, the money transferred must be taken into income by the contributor. An additional 20% tax has to be paid in addition to the regular tax. If the contributor (or his or her spouse) has the room, they can transfer up to $50,000 into their RRSP and maintain the tax-sheltered status. But that is only if they have contribution room.

2)  Unlike an RESP, In-Trust accounts don't have to be used for education.

3)  As compared to just saving for your child in a regular account, with trusts you don't have to pay the taxes on capital gains. Your child pays the taxes on gains. Your kids will likely have little or no income when they turn 18 and start withdrawing the money, so they usually end up paying little or no tax.

4)  If you wish to use any of the money you rolled over to your RRSP from an RESP, it will be subject to withdrawal tax, just as any money withdrawn from your RRSP would be.

5)  With an In Trust account, you can access your funds immediately, without having to roll them into your RRSP and you won�t be highly taxed, the way you are with RRSP withdrawals.

You generally still have to pay the taxes on dividends, interest or other income from the investments in the account. That means you should choose investments, such as stocks, that will experience most of their growth in the form of capital gains. It�s important to set up trusts correctly. I�ll be happy to help you do so.