Strategies for Financing Your Children’s Education

Written by Michael Gibney

childeducationBack when you went to college, tuition was relatively cheap because it was subsidized heavily by the government.

But times have changed.

In this era of recession and government cutbacks, more and more educational costs are shifting from the government to the individual student. As this trend continues, experts predict that 20 years from now it will cost the average student over $40,000 in tuition alone to get a four-year degree.

Even today, many students are walking away from college or university and into an uncertain job market with $30,000 or more in student loan debts. Not exactly the best way to get started in life!

In light of these financial realities, it’s only natural that parents and grandparents want to help ease the financial burden on their children and grandchildren when it comes to education.

But what’s the best way to do it? And how will giving money towards a child or grandchild’s education impact your tax bill?

Apart from simply giving money directly to the student, several planning opportunities exist to help fund post-secondary education while providing a significant tax benefit to you. Here are a few of them:

  • In-trust accounts
    This is an arrangement whereby an adult transfers assets irrevocably in trust to a minor. Rather than giving assets outright to a child, a trustee (usually a parent) controls them on behalf of the minor until he or she becomes an adult and the assets revert to the child. This allows a shifting of assets that may offer some tax advantages, subject to certain limitations. The interest and dividends are taxed in the hands of the contributor annually. However, realized capital gains are taxed in the hands of the child annually, which is typically a lower tax rate.
  • RESPs (Registered education savings plans)
    This program is designed to provide incentives to save for college through a tax-deferred savings plan. Students can then use the money from such plans to attend a qualified education program. The assets grow, tax deferred, and earnings are paid at the student’s rate when the funds are withdrawn, thus reducing the overall tax bill paid on the earnings. The subscriber who establishes the account retains control over the funds and decides when to pay the assets to the student.

    The contributory limits for RESPs are $4,000 per year for cash beneficiaries with a lifetime maximum of $42,000 per beneficiary. The government has also provided an incentive to contribute to RESPs in the form of the Canadian Education Savings Grant, through which they match of 20% of your contributions, up to a maximum of $400 annually. If the funds are not needed for the child’s education, they are returned to the subscriber, and the earnings become taxable at whatever rate the subscriber is currently paying, plus a penalty of 20% unless the assets are transferred directly to the subscriber’s RRSP. Most RESP plans invest the assets in diversified mutual funds in order to gain the best return.

  • Family or portfolio trusts
    These types of trusts can be used in family business structures or with investment assets. They provide the ability to fund educational costs with tax efficient dollars as well as other estate planning advantages. You will have to consult your accountant for more information, as they can be quite complex.
  • Tax law provisions
    Current tax regulations also provide certain tax credits for items such as tuition costs that can effectively reduce the cost of higher education subject to income limits. You will have to consult with your accountant or certified financial planner for more information on such provisions.

2 Responses to “Strategies for Financing Your Children’s Education”

  • winfred says:

    Hi ,
    Thanks for your guidelines on how to save for the chid education am a single mother of one child and my child is in high school and now am very much worried because she is out of school due to lack of school fees .I do not have an immediate solution and days are still moving .Kindly let me know if you can help even if it means going out of your way and offer to pay for her .call me on +254720501203

  • Cat says:

    On November 5, Canadian students are joining to march on Queen’s Park and demand lower tuition fees. We do this every year, and near as I can figure, we’re going to keep doing it, as long as we have to tackle these huge fees.

    From our point of view, a university education is virtually necessary if one wants any kind of a job these days. And from the government’s point of view, an educated populace is a stronger, healthier, employed populace. No matter which way you look at it, accessible post-secondary education makes sense.

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