Statistics Canada estimates that by 2019, the total cost of a four-year university education in most provinces will be $74,000, including tuition, rent, food, books and additional fees.
So it is no surprise that parents are looking for efficient ways to finance their children’s educations. Often the parent, or a grandparent, will gravitate to a Registered Education Savings Plan (RESP), the country’s top choice for financing higher education.
The popularity of RESPs stems from tax-deferred compounded growth, lower taxes on withdrawals because they are taxed to the child, and federal grants that help build the savings even faster.
But if the beneficiary decides not to get a higher education you may not be happy with the rules for accessing the money you have been putting aside.
For one thing, you must return to the government the grant portion of the RESP.
Then, in order to access the remaining money, three conditions must be met:
- The account must have been open for at least 10 years.
- The beneficiary must be at least 21 years old and be ineligible to receive education assistance payments from the plan.
- You must reside in Canada.
And then you have only two choices:
- Transfer the money to a Registered Retirement Savings Plan (RRSP) held by you or your spouse or partner, provided there is contribution room.
- Withdraw it as cash and pay both your marginal tax rate as well as a 20 percent penalty.
If those conditions do not suit you, there is an alternative: Open an informal trust account.
The key difference between saving in-trust for your child and setting up a RESP is that the child has guaranteed access to the cash when he or she reaches the age of majority in your province. The money does not have to be used for schooling but could instead go toward travel, buying a car or home, or setting up a business.
But the money does belong to the child. You cannot access it unless it is for the benefit of the child. The money in a RESP belongs to you.
These informal trusts differ from formal trusts. The latter require a legal trust agreement, generally cost more to set up and administer, and are usually used for very large sums of money.
Informal trusts are simpler to set up and generally take the form of an in-trust account with a bank, trust company, credit union, investment company or mutual fund company.
Unlike a RESP, there is no limit on how much money may be held in the trust and no limits on when and how much you can contribute. That means you can put aside more than the lifetime maximum of $50,000 per beneficiary allowed by the registered plans. However, the trusts do not qualify for the federal education grants.
While setting up and contributing to an in-trust account is relatively simple, the tax structure is complex. Income attribution rules apply to in-trust accounts. That means such first-generation income as dividends and interest are taxed in the hands of the higher tax bracket parent or adult who set up the trust in the year they are earned. If the trust is used exclusively to save child tax benefits, however, interest and dividends are taxed solely to the lower tax bracket child.
Generally, then, in-trust accounts focus on growth stocks or mutual funds that invest in stocks, where growth is primarily from capital gains. And unlike most registered plans, there is no limit on foreign investment holdings. Capital gains are secondary income, thus they are taxed to the child.
When money is withdrawn, the beneficiary will not owe taxes on the amounts you contributed. That’s because you put in after-tax dollars, so you have already paid income tax on the principal invested.
The Real Costs of College
When you think about how much it is going to cost to send a child to college, you often concentrate only on the direct costs such as tuition and books. But there are indirect costs that also need to be considered.
Here is a list of both types of expenses to evaluate when you are planning the costs of giving your child a higher education.
Direct Costs:
Tuition
Some schools charge a flat fee, but others charge by the credit hours taken. Assume a minimum of 15 hours per term.
Room
This depends on whether the student lives in a dorm, an apartment or group house, or with a relative. Colleges usually provide an average figure for dorms, so use that because you won’t know the actual amount until your child has been assigned a room. Rule of thumb; assume between $3,000 and $4,500 a year.
Board
If your student eats on campus, the school may require all meals to be taken in a dining hall or other campus facility. Some schools offer flexible meal plans, which are handy if your child does not need three full meals a day seven days a week. The school’s estimates won’t include snacks or socializing. If the student lives off campus, calculate based on the usual amount consumed in a week at home.
Fees
Some fees are required and others depend on the course of study. For example, if your child takes science courses, you may be charged a lab breakage fee for each course. Some schools charge a student services fee based on participation in certain activities. And there may be fees for uniforms and equipment if the student plays a sport.
Books and Supplies
This also depends on the student’s field of study. Science books can cost as much as $75 or more, and a literature course could require as many as 10 books. There may also be charges for workbooks, photocopied articles and study guides. A rule of thumb is to calculate between $500 and $700 a year.
Indirect Costs:
Transportation and Travel
Include commuting from the local residence to classes unless the student lives on campus, and travel expenses to and from home during school breaks. If the student has a car, include parking fees, insurance payments, and gas, oil and maintenance.
Personal Expenses
Don’t forget the costs of laundry, entertainment, toothpaste, razor blades, haircuts and the like. They add up.
All the calculations are based on a domestic school. If your child is going to study abroad, you will have to take into account the cost of living in the other country as well as exchange rates.
Because of the complex taxes involved, be sure to consult your professional advisor for help minimizing taxes and getting the most out of an in-trust education account.
Conclusion
For over 30 years Joe Truscott has been assisting his clients in planning for the assistance of their children with their educational needs. There are various planning options available to meet these challenges, so if you have any questions, please call Joe Truscott at 905-528-0234 or email Joe at [email protected].
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