Tag: Schooling

Three new R’s of education finance: RESPs, redress & realignment

The Registered Education Savings Plan (RESP) has the ability to tax-shelter income and the potential to shift eventual realization to a lower-tax-bracket student beneficiary.  

What’s more, the federal Canada Education Savings Grant (CESG) program and its provincial counterparts offer additional support to the RESP, a kind of immediate return just for the sake of participating.

Unfortunately, some misalignment of key legislation could have threatened the availability of these supports – but a couple of recent fixes should get things back in line.

Provincial support – Redress

Federal supports paid into RESPs do not use up a beneficiary’s RESP contribution room, nor do they themselves attract or reduce further federal support. For provincial support initiatives to be similarly treated, until recently they had to be either prescribed – that is, specifically listed under federal law – or directly administered by the federal government.

The 2010 Federal Budget redressed this concern by clarifying that all payments made to an RESP through a program funded, directly or indirectly, by a province or administered by a province, will be treated the same way as federal supports.

Editor’s note: As of September 2010, Invesco Trimark will have completed all compliance requirements for participation in the Quebec Education Savings Initiative (QESI), one such provincial initiative benefiting from this clarification. 

Additional CESG – Realignment    

Basic CESG is based on subscriber contributions, whereas additional CESG also depends on net family income (NFI), which looks back to the previous year’s income or possibly two years back. Both basic and additional CESG are subject to maximum dollar amounts.

In the 2009 Federal Budget, the two lowest personal income tax brackets were directly increased, rather than applying the otherwise calculated indexation factor. A problem became apparent in calculating additional CESG, as the federal CESG Act referenced the expected indexed calculation, not the actual new brackets. 

The 2010 Federal Budget amended the methodology to realign net family income for CESG to the revised brackets. Without this adjustment, a family that had previously qualified for additional CESG might not qualify in future because of this issue. 

With this realignment, the additional CESG rate of:

  • 20% is available on 2009 contributions where 2007/2008 NFI is up to $40,726, and on 2010 contributions where 2008/2009 NFI is up to $40,970
  • 10% is available on 2009 contributions where 2007/2008 NFI ranges from $40,726 to $81,452, and on 2010 contributions where 2008/2009 NFI ranges from $40,970 to $81,941

Speaking up for RESP subscribers

As an aside, a member of our RESP department discovered the discrepancies shortly following the 2009 Federal Budget and communicated this to Human Resources and Skills Development Canada (HRSDC). While we can’t claim responsibility for the ensuing changes, we are pleased that our voices were heard and our concerns were addressed on behalf of RESP subscribers. 

EstateWISE – Education planning trust

An elderly grandmother wishes to provide that an inheritance to a newborn grandson be used for post-secondary education.  How can she be sure that the money is not instead frittered away? 

Why can’t this grandmother simply pay for the grandson’s education directly? 

  • If she is alive at the time, then that’s exactly what she would do
  • However, if she has died before the child begins (or finishes) schooling then she can use a testamentary trust in her Will to dictate how his inheritance will be managed 

How far can she go to control how the money is dispensed to the child?

  • As long as the terms of the trust are not illegal or immoral — and we are talking about education here — then she has great latitude in how the trust will be managed
  • In the absence of detailed trust terms, a beneficiary who is mentally capable and is of the age of majority is entitled to an inheritance
  • In this case, the terms of the trust would state that the entitlement to capital would be delayed until one or more distribution dates after the age of majority

How does the child then get access to the money for his/her education?

  • Grandmother will have empowered the trustee — likely the child’s own parent — with discretion to encroach on that capital prior to those dates if it would be in the best interests of the child
  • The trustee would be able to pay the money directly to the institution, just to make sure it doesn’t get diverted into a less education-related purpose — like a sports car — on the way to the registrar

What if the grandson does not enter or continue in school?

  • If grandmother is adamant that the funds be used for education and nothing else, she could put that in the trust terms, and then have another beneficiary for the remaining funds
  • More likely, the distribution will simply be delayed until one or more later dates as mentioned, when hopefully the child is more mature and is in a stable work environment
  • This alone would be an incentive, or you can get even more strategic about the terms so that the ultimate distribution is that much more delayed if school is not completed

Is there a way to dovetail the inheritance with the child’s other funding sources?

  • Grandmother could get creative in the trust terms to explicitly have a formula, or use a reward system to accelerate the inheritance 
  • Usually though, it would simply be left in the discretion of a responsible trustee