With education costs on the rise, it is becoming more and more important that Canadian parents who want to help pay for their children's education start saving as soon as possible. Although having time on your side is always one of the best advantages when investing, other tools available in Canada can help parents get a leg up on an otherwise daunting task.
A Registered Education Savings Plan (RESP) is a Canadian tax-sheltered investment account for saving for a child's post-secondary education. The money within the account grows tax-free until taxed in the student's name upon withdrawal. This is thought to be a second tax advantage because students usually have a lower marginal tax rate than the other taxpayers in a household.
In addition to the tax advantages, other benefits of having an RESP include the following special incentives:
- Canada Education Savings Grant (CESG) - The CESG is a grant that is paid directly into the RESP and acts as a matching program to encourage saving. The amounts change regularly with federal budget changes, so it is advisable to discuss with a financial planner the amounts you are eligible to receive. For example, as of 2012, a child's RESP is eligible to receive 20% matching for contributions of up to $500 for each child. In order to receive the full $500 you would need to contribute $2,500 a year.
- Canada Learning Bond (CLB) - The CLB is another grant available from the government of Canada to help lower income families start saving for their children's education. As with the CESG, the CLB eligibility levels change with inflation and are reported in each year's budget; therefore, speaking with a professional to determine how much you are eligible for each year is important. Children eligible for the CLB must be born after Dec. 31, 2003 and the child's family must be receiving the National Child Benefit Supplement (NCBS). The money received from the CLB includes: $500 deposited directly into an eligible plan upon approval and an extra $100 each year, until the child turns 15 years of age. The family must continue to meet the requirements in order to receive the additional $100 yearly.
Each province has the option to come up with its own incentive programs to encourage saving for a child's education. Because these programs differ greatly, find out what your province has to offer by contacting your provincial government or checking out their website for details.
It follows that a province with a large surplus most likely has greater incentives available to families than a province running a budget deficit. As with the federal programs, the eligibility requirements and amounts available change often as inflation and budgets change. Checking in often with a financial professional or your provincial government will help to ensure that you and your family are taking advantage of all that is available.
A good example of a provincial program is the Alberta Centennial Education Savings Plan (ACES). This program provides children born on or after Jan. 1, 2005, with a $500 contribution into an RESP after it has been opened. In addition, three $100 ACES grants will be deposited into RESPs for children when they turn 8, 11 and 14. (See the Government of Alberta's website for more information.)
Other Sources of Money
Getting started is often the hardest thing to do, so in addition to the incentives that are available for a child's RESP, the federal government has other programs available to help parents with their new bundle of joy by providing tax-free sums of money to new parents to help with whatever they see fit. Parents could use it to start their new child's RESP, as 18 years of tax-free growth on free money is nothing to reject.
- Canada Child Tax Benefit (CCTB) - The CCTB is a tax-free payment from the federal government made monthly to eligible families to help with the cost of running a family. As long as the family remains eligible, the payments continue every month until the last child turns 18. Eligibility for this benefit is based on family net-income levels, and as such, changes with inflation and the federal budget. Consult Human Resources and Development Canada or your financial professional to ensure that you take advantage of the options available to your family.
If the child being cared for is severely handicapped, this benefit can also include the Child Disability Benefit (CDB). If the family meets low-income criteria, the National Child Benefit Supplement (NCBS) would also be included. The NCBS requires the same criteria to be met as the CLB.
- Universal Child Care Benefit (UCCB) - Similar to the CCTB, the UCCB is paid monthly to families to aid in raising children. The UCCB pays families $100 per month per child under six years old. The eligibility criteria of this benefit are not based on family income levels. Instead, the parent receiving the benefit must live with the child and be primarily responsible for the child's upbringing.
In addition to the federal programs listed in this section, each province has its own programs to help parents meet the needs of their families. Be sure to contact your local government office to learn what you are eligible for.
In reality, most families are not able to take advantage of every program. Families that are eligible for the low-income benefits usually have to use that money to pay for food, clothing and shelter so that their children have a comfortable upbringing. Although not every program is used by every family, at least several programs are always available to help you get started. In this short example, we follow a young middle-income family that takes advantage of a few of the programs listed.
Sally and James Johnson have one child, Fred Johnson, born March 25, 2006. Their family net income in 2008 is $70,000, and they are residents of Alberta.
Starting on March 25, 2008, (their child's birth date), based on the information above, the family is eligible to receive the following benefits:
- An RESP
- CESGs after contributions begin
- The ACES grant of $500 when the family first starts its RESP with an initial $100 contribution, and an additional $100 on the child's 8th, 11th and 14th birthdays
- Approximately $50 each month in CCTB (expected to increase to keep up with inflation every year)
The assumptions are:
- The Johnsons will take advantage of all programs that they are eligible to use in Fred's education savings plan.
- For the purpose of proving how much of an advantage these government programs provide to families starting to save for their children's education, in this example, the Johnsons will not contribute any of their own money toward Fred's education savings.
- Salaries will remain constant with inflation (that is, no raises will be received). This constant ensures that the family will remain eligible for the programs in which they are currently enrolled.
- The plans discussed previously will not change the family's eligibility or the payout structures of the plans.
- Investment accounts will grow by 7% per year.
In March 2008, Sally and James Johnson start an RESP through their financial planner to begin saving for their two-year-old son's education. Because they are residents of Alberta, their planner advised them to also apply for the ACES grants. They used their monthly CCTB payments to set up a preauthorized investment plan of $50 per month (increasing 2% per year) into Fred's RESP. After two months, $100 is invested, and the Alberta government deposits $500 into the investment account. The preauthorized contributions continue until Fred's 18th birthday (March 25, 2024). On each of Fred's 8th, 11th and 14th birthdays (2014, 2017 and 2020, respectively), another $100 is invested by the Alberta government. On all of these contributions, the CESG provides matching contributions in some amount.
On Fred's 18th birthday, he will have about $30,800 in his education savings account – not a bad start considering it all came from the government. Now imagine what Fred could have if his parents put a little bit of their money in as well.
The Bottom Line
Saving for education is difficult and will continue to become more difficult as inflation continues to move the prices upward. Education costs have been increasing much higher on average than inflation rates. But it doesn't have to be impossible. Programs exist to get good free money from the government and allow it to grow, tax-free, until your child needs it.