Easiest 20% Return You Can Make

by : News Canada



(NC)-Many parents with hopes and dreams of a post-secondary education for their children also wonder where all the money will come from to pay for this education.

According to Statistics Canada, the average tuition fee for a full-time undergraduate arts student in Canada was $3,526 for the 2001/2002 academic year. Nova Scotia had the highest average tuition fees in this faculty category at $4,732 per year. But all across Canada, parents are feeling the pinch.

"A prime concern of parents who come to see me about post-secondary education costs is 'what can I give my child?'" explains Aaron Dressler, a Halifax-based certified financial planner (CFP) who works as a financial adviser with CIBC Imperial Service.

The federal government, says Dressler, may have the answer. In 1998, a new feature was added to the Registered Education Savings Plan (RESP) called the Canada Education Savings Grant (CESG). Under the revised plan, each child under the age of 18, with an RESP, will be eligible to receive a grant from the government of 20% of the first $2,000 contributed to the RESP each year. That means, if parents or other family member "subscribers" contribute $2,000 to the plan in one year, the government will contribute another 20%, or $400, to the child's RESP.

"I tout this as among the easiest 20% return on your money that you can make," says Dressler. "Combined with other benefits and fewer restrictions than before, an RESP is truly a fantastic solution for many parents." While Registered Retirement Savings Plans (RRSPs) are eligible for tax deductions, the RESP is not. However, money in the plan accumulates tax free until withdrawal. Furthermore, once withdrawn, the money is taxed at the typically lower rate of the beneficiary (the student).

New RESP regulations also alleviate many of the old parental RESP woes. If the child does not attend a post-secondary institution, contributions can be withdrawn without being taxed, since they were after-tax income. However, the grant money is taken back. Up to $50,000 of accumulated income earned in the RESP may be transferred to the subscriber's RRSP if contribution room is available. Alternatively, income may be withdrawn from the RESP by the subscriber, subject to regular income tax and an additional 20% tax.

More parents are beginning to embrace the concept of RESPs, says Dressler, once all the rules and regulations are fully explained and people gain a better understanding of the costs of post-secondary education. "I often find that even parents who once thought that RESPs were not for them find, after discussing their options, that an RESP can be used as part of their financial plan after all."

There are many additional ways to maximize the value of your child's RESP. For more information, speak to your financial adviser.

This article is intended to provide general information and should not be construed as specific advice. This article is not applicable in Quebec.

- News Canada

RESP contribution options

  • Maximum grant that can be earned in any one year: $400

  • Maximum grant that can be paid in any one year: $800 ($400 grant for current year plus $400 grant carry forward from previous year)

  • Maximum contribution that can be made to an RESP per year: $4,000

  • Lifetime maximum contribution: $42,000

  • If no contribution is made to an RESP one year, the contribution room for the grant (maximum $400) can be carried forward to another year