Tag: Minor child

Transitioning RESP to TFSA

The Registered Education Savings Plan (RESP) has been with us for decades now. Alongside, we have witnessed the evolution of the Canada Education Savings Grant (CESG) and other targeted financial support programs. Combined, these are powerful education savings vehicles for many Canadian families.

But can the RESP be even more than a tool for financing education? Can it, in fact, double as a tool for educating on finance itself and be an avenue for establishing lifelong savings habits for both parents and children?

Here are some considerations as to how coordination of the RESP and tax-free savings account (TFSA) might indeed pave the way to that future.

Age horizon for the CESG

The basic CESG entitles an RESP subscriber to 20% in matching grants on contributions. That equates to $500 of grant money that can be earned for a given year of the RESP beneficiary’s life, though as much as $1,000 may actually be paid during a plan year if there is unused room from prior years.  

While an RESP can exist for as long as 35 years, the latest date at which CESG can be earned and paid is the year in which the RESP beneficiary turns age 17. Thus, for many families the practical timeframe is much shorter, particularly if the student is in the common education stream completing secondary school in his or her late teens.  

Whether it makes sense to continue contributing to an RESP beyond this CESG eligibility timeframe will depend on the tax characteristics of both subscriber and beneficiary (most often parent and child, respectively). For some thoughts along similar lines, see my Tax & Estate Matters article from September 2010, “They grow up fast: Coordinating RESPs and ITFs.”

Age onset for the TFSA

Coincidentally, just when the CESG ceases to be available, the TFSA opportunity begins.   

Annual TFSA contribution room (currently $5,000) begins to accumulate the year a Canadian resident turns age 18. If the age of majority in the province is 19 then there would be a year’s delay until a TFSA could be opened. (See grid below.) Fortunately, the contribution room at age 19 would include the carryforward from the prior year, totaling to $10,000 currently.

Continuity of the savings habit

After years of saving, no doubt many parents eye the end of RESP contributions as a welcome release of funds to the household budget. It’s okay to splurge a bit, but they should also keep the big picture in view.

The upward trend of tuition and surrounding education costs does not appear to be abating. Case in point, my brother tells me his son’s first year away at university will cost $25,000. At that rate, even parents who had conscientiously saved may find their RESP resources depleted well before junior dons the cap and gown.

Accordingly, it may be prudent to continue earmarking funds toward education savings. Failing that, parents may have a basement boarder much sooner than anticipated.  

And while it may feel like a leap of faith to give money directly to a child for a TFSA, if carefully structured with incentives, parents can still hold some strings while teaching their young adults important life lessons in tax-efficient saving.

Age of majority

Age 18 – AB MB ON PE QC SK

Age 19 – BC NB NL NS NT NU YK

Source: Citizenship and Immigration Canada

Children’s activity tax credit: A tax break, whether or not my boy’s the next Crosby

Hockey season has started, and for now my wife and I are still just observers. But with three boys under the age of six, future fall seasons promise to be much more hectic — and costly!

It was therefore with a degree of selfishness that I took note of the Ontario government’s recent proposal for a new Children’s Activity Tax Credit. Legislation was subsequently introduced, and the bill had gone to second reading as of September 30. This will put Ontarions on a similar footing with their cousins in Manitoba, Nova Scotia, Saskatchewan and Yukon.

Predictably, some of the immediate press response to the proposal was that it was a bit of a deflection from the heat of the HST. Politics aside, and appreciating that this is not an earth-shattering amount, it is nonetheless an encouragement for children’s development.

What it’s worth

Under the proposed tax credit, parents would be able to claim up to $500 of eligible expenses per child. At the 10% base credit rate, that would result in a tax credit worth up to $50 per child, or up to $100 for a child with a disability. 

Assuming passage of the bill, the credit is slated to apply to expenses incurred from 2011 onward. 

It is currently structured as a refundable credit, which is a positive for low-income parents who otherwise have no tax due. Note, however, that the calculated credit will be reduced proportionately for any reimbursement, allowance or assistance that the parent does not include in income. As well, the child care expenses deduction must be claimed first if an amount is eligible for both credits — that is, there’s no double-dipping — but any unused excess could be claimed under the activity credit. 

On the disability front, if the tax credit for physical or mental impairment may be claimed with respect to the child, then the additional amount is available. Essentially, if at least $100 is spent on qualifying activities, then a further $50 credit may be claimed in addition to the amount calculated using the formula. 

Not the next Crosby?

On the sporting/fitness side, the credit will be available where the program qualifies under the definitions for the federal children’s fitness amount tax credit.

Importantly, the Ontario credit is also to cover non-fitness activities that might be better categorized under the banner of arts and other cultural activities:

  • Instruction in music, dramatic arts, dance and visual arts;
  • Language instruction;
  • Activities with a substantial focus on wilderness and the natural environment;
  • Structured interaction among children where supervisors teach or help children develop interpersonal skills; and
  • Enrichment or tutoring in academic subjects.

All of this is especially good news in our household, as to this point we have one boy holding his stick by the blade, another analyzing its composition, and the littlest one preferring to chew on it.

The bottom line

The practicality for us is that we would be and are spending the money anyway, whether it’s on physical activities or other extra-curricular endeavours. 

Still, at $50 apiece for this credit, plus the $75 on the federal level, that translates into $375 based on our three kids. 

And by the way, there’s no maximum income threshold or clawback mechanism to reduce the credit, so we look forward to some welcome tax relief. 

Steady/Study as she goes – Supporting education savings

In August the federal government released the Canada Education Savings Program (CESP) 2009 Review.  

This is the umbrella under which is housed the familiar Canada Education Savings Grant (CESG), and the apparently not-so-familiar Canada Learning Bond (CLB).  (More on the CLB below.)

Overall, past performance metrics for the CESP seem quite positive, and the trajectory for the future appears similarly on neutral to favourable ground.

RESP – Contributions and asset growth

While annual RESP contributions increased in 2009 to just over $3.1B, that is less than a 1% increase over 2008.  At the same time, the number of RESP beneficiaries increased at a slower rate in 2009 (about 6.8%), than the average for the preceding 3 years (9.2%).  Not surprisingly then, annual contributions per beneficiary dropped (by 1.5%) last year for the first time since 2001, falling to an average of $1,423.  

When the CESP was introduced in 1998, Canadians held $4B in RESP assets.  By the end of 2009, those assets had grown to $25.9B, and apart from the 2008 downturn when there was a 3% decline, RESP assets have increased every year since CESP inception.  

Of course a 3% drop is a mere blip in comparison to the way general investment and retirement portfolios may have fared in 2008.  Consider though that the asset tally includes existing assets from the prior year plus contributions and CESP supplements.  Respectively, those additions in 2008 were $3.1B and $599M.  If one carves out these additions, existing assets declined by about 19% that year.

And though one might expect fairly conservative approaches to RESP investment, I am reminded of a friend who stuck it out with the markets through the downturn.  With one child having started university in 2009, and another commencing this September, he is now lamenting not having glided to conservatism in these lead-up years.  He may work a bit longer to pay the education tab now, but presumably their success will be the payback.

CESG – Dollars and participation rates up

Total CESG payments have increased every year since CESP inception, up 2% from 2008 to 2009 at $612M.  Over its history, the CESG has contributed almost $5.1B toward education savings.

The average age of new beneficiaries has decreased every year since CESP inception in 1998 when the average child was almost 8 years old.  For 2009, average age is 3.6 years, which the Review suggests is evidence that the program has encouraged families to begin saving early for post-secondary education. 

It is estimated that over 40% of children up to age 17 participated in the CESG in 2009, with peak participation occurring in the 5-9 age range at over 45%.  There is no explanation or suggestion for this phenomenon, though greater promotion in recent years may explain higher participation of younger children.  As to the very young, as a parent who is just getting the last of 3 out of diapers, I think I know where some of the money (and distraction) goes early on. 

CLB – Money left on the table

While much of the report is rosy, one troubling aspect is the low participation rate for the Canada Learning Bond.  Acknowledging that participation rates have increased by about 5% annually from 2005 inception up to 2009, a rate of 19.3% is unfortunately low.

To summarize the CLB, it is aimed at children from low-income families, using entitlement to the National Child Benefit Supplement (NCBS) as the qualification criterion.  It pays an initial $500 directly to a child’s RESP, and another $100 for each year of continuing eligibility to age 15 – and does not require matching parent contributions. 

So, if qualification is independently determined, and the parent need not be out-of-pocket … why don’t we see 100% participation?  I can’t answer that, but I do have a suggestion.

This is not a mere statistical estimate of qualification: The NCBS, as part of the Canada Child Tax Benefit (CCTB) program, is monitored using parents and children’s social insurance numbers.  This is tracked and shared with those parents on CRA’s “My Account” secure web-server.

So here is the suggestion: 

Maybe the government could credit the CLB amounts to the appropriate My Account location for children of NCBS entitled families.  Credits would earn no income, but could be wired to a financial institution once an RESP is actually opened.  If no RESP is ever opened, then the credit could be triggered in future if and when the child claims a tuition credit or provides similar evidence of qualifying post-secondary education.  

It may not be quite that simple, but I don’t think it’s much more complicated.