Back around Labour Day I was catching up with my brother’s family and asked my nephew about his university plans, this being his last year of high school.
Apparently the little “Honours List-er” has decided on life sciences, a quick MD and a turn of PhD research – all slated for a series of universities a province or so over.
He and my brother laughed when I asked if he had some hidden trust account, but there was an almost perceptible alignment between my nephew’s shrug and my brother’s cringe when I followed with, “So how’s your RESP doing?”
In-trust accounts
In seriousness though, in the time before we had Registered Education Savings Plans (RESPs), the classic in-trust-for (ITF) account was a common recommendation to parents and grandparents planning for such education costs. There was no legal limit on how much you could put into an ITF, which is still the case today.
The growth of such funds benefited – then as now – from strategically choosing investments that generate capital gains. As opposed to interest or dividends, these gains are taxable to the trust beneficiary, presumably at a lower tax bracket than those at older generations.
RESPs and CESGs
Of course, today the core of education savings is the RESP, which similarly enables a shift of taxation from contributor to plan beneficiary, and does so while tax sheltering growth in the interim.
When the 20% Basic Canada Education Savings Grant (CESG) is factored in, one would be hard-pressed to forego such an immediate return on contributing to an RESP.
Where the twain shall meet
Let’s not turn our backs on the ITF too soon, however. Beyond the CESG threshold, an ITF remains a very good option to an RESP:
- A well-managed ITF geared toward unrealized capital gains will experience similar tax-sheltered deferral
- Both structures allow for the tax-free return of principal or contributions
- On withdrawal, income is fully taxable under an RESP but only one-half taxable for an ITF that is then recognizing capital gains
- Penalties result where a beneficiary does not attend a qualifying program under an RESP, but there are no such restrictions with an ITF and if desired the account can roll over at its cost base to the beneficiary without triggering as yet unrealized gains
Perhaps none of this is much help to my brother at this stage, but it’s a good lesson for me personally as my own three little ones begin the trek.