Student – Page 2 – Doug Carroll

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.

They grow up fast: Coordinating RESPs and ITFs

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.

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.