Getting kids off to that first year of university or college is a big move in more ways than one. It’s exciting and stressful and emotional – and that’s just for the parents! As the universities like to remind us, this isn’t kindergarten, so resist the temptation to “hover.” They really, really do not
want you to move into the dorm with Zack or Samantha. But what you can (and should) do is make sure your newly independent offspring gets off to school on the best financial footing possible. Here’s how.
Post-secondary education is expensive. Start a Registered Education Savings Plan (RESP) for your child as early as possible. Funds contributed to an RESP will grow tax-free while inside the plan. Qualified investments are essentially the same as for RRSPs or TFSAs, and include cash, GICs, stocks, bonds, mutual funds, exchange-traded funds).
Tax efficient withdrawals.
When the plan matures, the child (or children in the case of family plans) who is named as beneficiary can withdraw the funds for post-secondary tuition. And because the child at that stage will very probably be in a very low tax bracket, little or no tax will be payable on the withdrawals.
Anyone may open an RESP for a child (who must have a Social Insurance Number), including parents, grandparents, relatives, or friends, and there is no annual limit for contributions. But there is a $50,000 total lifetime limit that can be contributed for a single beneficiary. Excess contributions are subject to tax at a rate of 1% per month, so it’s important to keep track of who is contributing how much to any given RESP.
One important feature of the RESP is the Canada Education Savings Grant made by the government, which amounts to 20% of annual contributions to all eligible RESPs to a maximum $500 (up to $1,000 if there is unused grant room carried forward), to a lifetime limit of $7,200. There is also an additional CESG amount available on the first $500 contributed to an RESP, ranging from 40% to 20% depending on family income.
Students begin receiving payments from the RESP as soon as they are enrolled in a qualified post-secondary educational program, including colleges and universities, apprenticeship programs offered by trade schools, and CEGEP in Quebec.
Tax breaks and benefits
There’s a host of tax deductions and credits available to ease the cost-burden of post-secondary education. But they don’t come automatically. So here’s a checklist of tax breaks available for your budding scholar. And don’t forget, many of these are transferable to you if your student can’t use them all.
- Non-refundable tax credits: These reduce the amount of federal tax payable up to the amount owing. They can’t be used to generate a refund.
- Tuition, education, and textbook amounts. Tuition fees are indicated on official receipts from the post-secondary institution. The education amount lets students claim $400 per month of full-time enrollment ($120 for part-time). The textbook amount of $65 per month for full-time students ($20 for part-time) is available only if the student is eligible for the education amount. This credit must be reported on the student’s tax return first to reduce tax owing. Unused credit may be transferred to you or certain other family members, or carried forward for use in future years (amounts carried forward may not be transferred).
- Interest on student loan. If your student got a student loan, only he or she can claim the interest paid in the year, even if you’re the one who made the payment. This amount cannot be transferred to you or anyone else.
- Public transit amount. Only the student can claim the cost of a transit pass. Keep the pass or proof of purchase in case the CRA wants to see it.
- Canada employment amount. If the student was an employee in the year, for 2014, they can claim $1,127 or total employment income reported on their tax return, whichever is less.
Other child and family benefits may also be available, depending on the individual student’s circumstances. One deduction that's often overlooked is moving expenses, which can be used by a student who is enrolled full-time. It can be claimed for expenses incurred at the start of each academic period or when the student moves back after summer break or summer employment, provided the move is 40 kilometres closer to the educational institution or place of work.
To maximize the tax benefits of RESPs and make the most of deductions and credits, talk to a qualified financial planner
who can put all of this into the context of an overall family financial plan.
Courtesy Fundata Canada Inc. © 2014. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice.