Saving for your grandchild’s education
Is it best to use informal trusts or an RESP to save for a child’s educational future?
Let’s look first at the tax advantages: Informal accounts will provide for tax-free income accumulation from all sources (interest, dividends or capital gains) if the source of the funds is the Child Tax Benefit.
If the source is other capital originating with a related adult, only capital gains income can be accumulated in the hands of the minor.
With the RESP, there are two attractive features: tax-deferred compounding of investment earnings and the new Canada Education Savings Grant of up to $400 for each child (20% of the first $2,000 of annual contributions made to the RESP for beneficiaries up to age 18).
However, the answer to this question depends on two other issues: resources available while you are saving and flexibility desired when the child matures. For example, if a family can afford to part with the Child Tax Benefit, it would be wise to consider investing that money into an RESP for in order to reap the Canadian Education Savings Grant.
If a family can do both, save the CTB and invest more in an in-trust account, it should put the C in the in-trust account to ensure that the resulting earnings are taxed to the child (for most this will be tax free if income levels are under $7131 in 2000). Then invest the other disposable income into the RESP. If the family does not receive the CTB at all due to high income levels, from a tax point of view it may make sense to try to maximize receipt of the CESG grant, before making other in-trust deposits.
However, one must also look at the desired flexibility of the investments later, when the child matures. Remember, that if no beneficiary goes back to school, income can now be rolled back into the transferor’s RRSP (if there is unused RRSP room to take advantage of) or the amounts can be added to the transferor’s income, but with an additional tax penalty of 20%.
Excerpted from The Jacks on Tax Online Update Newsletter.