Kevin Greenard: A spring break refresher on RESPs

Parents and grandparents, who typically set up Registered Education Savings Plans (RESPs), are referred to as the “subscriber.” The children or grandchildren are referred to as the “beneficiary” of the registered plan.

Parents are juggling many different things. Financial planning may not be the highest priority, especially if paying bills is a challenge. With all the different types of accounts, it can be a little confusing on where best to put the little bit of savings that may be available. Do you pay down the mortgage, make an RRSP contribution, open up a TFSA, or save for your child’s education?

The answer is not always crystal clear, but narrowing down the options can help. My advice to parents who have limited discretionary savings is to first focus on the RESP. The reason for this is to get the grant money which we outline below. If you do not have any other investment accounts, then opening an RESP at a bank branch is likely the best and easiest.

The strategy I map out for young parents is to contribute $2,500 each year for the first fourteen years of your child’s life, and $1,000 when your child is 15. Doing the contributions early each year allows a greater amount of time for the value of the RESP to grow. If coming up with $2,500 as a lump sum is difficult, we suggest setting up a pre-authorized contribution (PAC) of $208.33 every month (assuming only one child). Automating this with your bank helps ensure you keep with the plan.

Tuition and textbooks are only part of the cost of education. Being able to have funds set aside for housing, living costs for school and transportation is important to add to the calculation. The RESP can help cover the costs of all of these expenditures.

One misconception is that the proceeds from an RESP can only be used to pay for tuition and textbooks. Withdrawals can be used to pay for all post-secondary education costs. The only reason we ask for a copy of the tuition receipt is to verify that the student is attending a qualifying education program or is enrolled in a specified education program. Most of the criteria focus on the programs having the appropriate number of hours.

Apart from the rising cost of education, the government provides the Canada Education Savings Grant (CESG) for contributions made up until the end of the calendar year in which the child turns 17. The basic CESG provides a grant of 20 per cent, up to a maximum of $500 per child. The lifetime maximum grant is $7,200. The plan noted above has annual contributions of $2,500 for 14 years ($500 CESG each year x 14 = $7,000) and a $1,000 contribution in the 15th year ($200 CESG). This contribution schedule enables the subscriber to claim and obtain the maximum $7,200 per beneficiary.

In addition to these federal grants, the British Columbia Training & Education Savings Grant (BCTESG) is also available. If you have children who were born in 2006 or later, the province will contribute $1,200 as a BCTESG. Below is a table taken from this website.

Grant application period for eligible children

The nice part about the BCTESG is that you just have to open an account and apply for this to receive $1,200 — no contribution is necessary. Most banks and credit unions will be able to assist you with the BCTESG; however, most full-service divisions of investment firms do not offer the BCTESG.

Now that we have mapped out the strategy of contributions the next decision is to decide how to invest the money. If you are eligible for the BCTESG, we recommend that you apply and keep these funds in a separate account. Because some firms do not offer the BCTESG, if you have included both BCESG and CESG in a single account, the entire account becomes tainted and you will not be able to be transfer the RESP to most full-service investment firms in the future.

With the BCTESG, we recommend investing this in a mutual fund at a bank or credit union. My opinion about the type of mutual funds when the beneficiaries are young, and the time horizon is greater, is to invest primarily in equity mutual funds.

With the account that is accumulating, the CESG, the funds can be invested in a number of different ways depending on the financial institution you are dealing with. If you open the account up at a bank or credit union then you are likely investing primarily in mutual funds. If you open the account up at a full-service investment firm then you could explore different options outside of mutual funds, especially once the account gets built up.

The priority, initially should be setting the savings discipline and obtaining all available grant money. As the beneficiaries get closer to needing the money, then shifting some or all of the investments into something more conservative to reduce risk generally makes sense.

Time to get educated

The time has come and the beneficiaries are going for higher education. Other than a copy of the qualifying “paid” tuition enrolment receipt (not the T2202A noted below) and a form signed by the subscriber, getting the funds out of an RESP is straight forward. The initial contributions from the subscriber are not taxed and can be paid out either to the subscriber or to the beneficiary — it is the subscriber who dictates how those funds are dispersed.

The CESG and the income earned (dividends, interest, and capital gains) are both taxed in the hands of the beneficiary as education assistance payments (EAP) when taken out. The firm you have the RESP through is referred to as the promoter and must issue a T4A to the beneficiary in the year of withdrawal. In most cases, we try to spread the EAP portion over four years (i.e. or the length of the program). The beneficiary will likely have limited other income while going to school. In the majority of cases, the end result is zero tax being paid on the CESG and the growth within the RESP.

Line 323: Your tuition, education and textbook amounts

The federal government eliminated the education and textbook tax credits in 2017. Students are still able to deduct eligible tuition fees paid for the tax year. A course typically qualifies for a tuition tax credit if it was taken at a post-secondary education institution or for individuals 16 or older who are taking a course to creating skills in an occupation and the institution meets the requirements of the Employment and Social Development Canada (ESDC).

The institution should issue a T2202A (Tuition and Enrolment Certificate) at the end of the year which lists the total paid in the calendar year that is eligible for the student to claim on his or her income tax return. The student must claim the amount paid even if mom and dad paid the tuition.

The student must first try to use the credits on their own tax return. Schedule 11 of the student’s tax return will list the total eligible tuition fees and the total tuition amount claimed by the student.

Line 324: Tuition amount

What if the student has limited or no income to utilize the tuition amount? The student has the ability to either carry the tuition amount forward to future years or transfer up to $5,000 of the tuition amount to your spouse, common law partner, parent, or grandparent. It is a little bit of a funky calculation and at first might seem a little strange.

I will illustrate with a student who has tuition costs of $9,300. During the year, the student earns $13,500 in taxable income. On Schedule 11 that we referred to up above, the student can claim some reductions of this. To keep things simple, we will assume only the basic exemption of $11,809 (2018) is available. The net amount is $1,691 ($13,500 - $11,809) and the student must first use this. The $9,300 total tuition amount is reduced by $1,691 (the amount claimed by the student. The amount remaining of the tuition amount is $7,609 ($9,300 - $1,691).

I know above I mentioned up to $5,000 can be transferred to your spouse, common law partner, parent, or grandparent. The maximum amount that can be transferred is $5,000 less the amount the student is claiming, which in this case is $1,691, equals $3,309. The student will then be able to carry forward, to future years the difference of $4,300 ($9,300 less $1,691 claimed by student and $3,309 transferred in the current year).

When I look at our client’s notices of assessments, I sometimes see unused tuition carry forward credits from previous years. Tuition amounts are non-refundable tax credits. This essentially means that in the past the client did not have any taxes to pay and was not unable to transfer the tuition amounts. Once the tuition amounts are carried forward to another year they are not able to be transferred. Although past carry forward tuition amounts did not provide an immediate tax benefit, they may have a current or future value. If you're not sure how current tuition costs should be claimed or transferred, we recommend you speak with your accountant.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250.389.2138. greenardgroup.com