Part VI – Real Estate: Skipping to Other Generations When Planning Your Estate

With the value in real estate and other holdings, many Canadians have accumulated a significant estate that involves planning.  Talking about estate planning need not be uncomfortable.  For many, this naturally leads to who you would like to receive your estate – either family, friends, and/or charitable groups.  The process involves mapping out a plan that minimizes tax, while at the same time ensuring your distribution goals are met.

The second stage of the estate-planning process is when we ask for clients to bring a copy of the documents they currently have in place. We also obtain a copy of their family tree and information about current executor(s), representative, or other individuals currently named in the will.

To illustrate the process, we will use a typical couple, Mr. and Mrs. Gray, both aged 73. They last updated their wills 24 years ago.  They have what is commonly referred to as “mirror wills” where each leave their estate to their spouse in a similar fashion.  The will also has a common disaster clause that if they were to both pass away within 30 days that the estate would be divided equally amongst their three children.  We will refer this to as the “traditional method”.

Since they last updated their Will, all three of their children (currently aged 56, 54, and 52) have started families of their own. In fact, the Gray’s now have seven grandchildren between the ages of 11 and 32, and two great grandchildren (aged seven and three).  None of which were born when they last updated their Will.

In reviewing their will, we noted that this traditional method of estate distribution left everything to their now financially well-off adult children, to the exclusion of their grandchildren. We highlighted that the current will does not mention the grandchildren or great grandchildren. In exploring this outcome, they expressed they wanted to map out an estate plan that also assisted those that needed help the most.

The last time the Gray’s updated their will they had a relatively modest net worth, but in the last 24 years they were able to accumulate a significant net worth. We had a discussion with Mr. and Mrs. Gray that focused around the timing of distributing their estate.

The traditional method effectively distributed nothing today and everything after both of them passed away.

We discussed the pros and cons of distributing funds early. During our discussion, the plan that was created was combination of components, parts involved a distribution to the grandchildren based on certain milestones.  They also wanted to make sure their grandchildren obtained a good education.  The estate plan details that we outlined in the short term were relatively easy to put in place and were as follows:

  1. For the youngest members of the family they wanted to set up and fund Registered Education Savings Plans (RESP) for all eligible grandchildren and great grandchildren. The RESP contribution shifted capital from a taxable account to a tax deferred structure. This effectively results in income splitting for the extended family. Another added benefit is that RESP accounts would receive the 20 per cent Canada Education Savings Grant based on the amounts contributed.
  2. For the family members already in university, the plan was to assist with the cost of tuition and other university costs up to $10,000 per year per grandchild.
  3. For the grandchildren who were at the stage of wanting to purchase a principal residence, they wanted to set aside a one-time lump sum payment of $50,000 specifically to assist each grandchild with the down payment on a home.

One of the more challenging areas of the Gray’s estate plan dealt with their real estate. In addition to their principal residence, they also owned a recreational property in the Gulf Islands. The recreational property had some significant unrealized capital gains. It was important for the Gray’s to ensure both properties were kept within the family, if possible. We called a family meeting together where we outlined different options to achieve this goal. The key with this part of the estate plan was communication with Mr. and Mrs. Gray and their three children. We were able to obtain a clear plan that was satisfactory to all family members.

The finishing touch to a well-executed estate plan is ensuring the details are clearly documented in an up-to-date will.


Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138.

This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in  this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a 
division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

Fee-based accounts benefit investors in the long run

A fee-based account is a tranparent way of paying your financial advisor.  The fee is charged based on the market value of the assets being managed, and it is distinctly different than a transactional account, where commissions are charged for every buy-and-sell transaction. 

When clients open up a fee-based account, they sign a fee-based agreement that establishes the agreed upon fee, how the fees are calculated, when the fees will be charged and the accounts involved.   

There are a number of benefits for clients in moving to a fee-based account. 

Working on a “fee for service” basis, rather than a commission or transactional fee basis, means the best interests of the client are more aligned with those of the advisor. If fees are based on the market value of the account, then the only way an advisor will be compensated further is if they can grow your account in value.  If your account declines in value, then so does the compensation paid to your advisor.  

Another benefit of a fee-based account is the additional services clients receive from their financial advisor.  Financial professionals today are rarely called stock brokers because the services offered extend well beyond buying and selling stocks. Financial planning meetings cover many topics such as tax and insurance as well as education, retirement and estate planning. 

Financial professionals today spend a significant amount of time understanding each client’s needs and integrating this into an increasingly complex tax and regulatory environment. 

As a result, the amount billed for fee-based accounts is referred to as an “investment council fee” for income tax purposes.  The main benefit is the fees relating to non-registered accounts can be deducted on your income tax return as a carrying charge.  If your fee is one per cent before tax, and your marginal income tax bracket is 30 per cent, your fees have a net cost to you of only 0.70 per cent.   

Fees are typically charged quarterly. As an example, Jane Wilson opened a new fee-based account and invested $750,000 on Jan. 1 with an annual fee of one per cent.  She will have no fees charged for three months. Around the middle of April, the first quarterly fees would be charged at $1,875 ($750,000 x 0.25 per cent).  Wilson’s fees are one-quarter of one percent after each quarterly period. 

Other methods of compensating that are not fee-based often have commission charges upward as high as five percent on the first day of buying the investments. For an advisor to be successful with a fee-based business, he or she needs to establish good long term relationships. 

The periodic payment of fees better aligns the interests of clients and financial professionals.  When explained to clients, most would prefer to spread out the fees over time as services are provided versus paying a large amount on the first day.  

One question we are asked is how the quarterly fees are actually paid.  To illustrate we will use Don Spalding, who has three investment accounts totaling $750,000 – $500,000 in a non-registered account, $200,000 in his RRSP account, and the remaining $50,000 is in a Tax Free Savings Account. 

There are a few different options for how Spalding can cover the quarterly fees. 

The first option is to have the fees charged to each of the respective accounts.  Wilson had only one account and the fee of $1,875 was simply charged to that one account.  Mr. Spalding has three accounts and each account is charged the respective amount based on one-quarter of one percent of the market value of each account. 

The first quarterly amount for Spalding is $1,250 for the non-registered account, $500 for the RRSP, and $125 for the TFSA.  He has the option of keeping cash in each account to cover the fees, depositing cash quarterly or selling investments. 

With fee-based accounts, Spalding has the option to instruct us to designate the billing of the fees to come out of one account.  Don could instruct us to pay the fees for his RRSP and TFSA accounts from the non-registered account.  This enables him to maximize the amount he maintains in his registered accounts keeping it tax sheltered. 

The payment of fees from a designated account enables an advisor to fully invest the non-designated accounts and to utilize compounding growth strategies such as the dividend reinvestment plan.  Fee-based accounts can assist with income splitting as the higher income spouse can pay the account fees of the lower income spouse.

Liquidity is another benefit of fee-based accounts.  As there is no cost to buy investments, the same applies to changing or selling investments.  If you require money for any reason, there is no commissions payable for selling or rebalancing your investments.  Rebalancing can include reducing a position that has performed well, dollar cost averaging on a position that has underperformed, adjusting sector exposure, modifying asset mix, and changing the geography of your investments. 

Another benefit of fee-based is the ability to link additional family members to the platform.  Clients with children and grandchildren often would like introduce them to the benefits of full service brokerage, but do not individually have the capital to be able to open accounts on their own.  This could include parents wishing to assist adult children in opening and funding Tax Free Savings Accounts and grandparents who wish to open Registered Education Savings Plans for their grandchildren.  Fee-based accounts that are linked can make wealth transfer strategies within the family group of accounts significantly easier.

Skipping a generation in your estate planning

I’ve heard several people over the years say they never thought they would have so much money. A growing number of aging people have accumulated significant savings and investments from years of savings, investing wisely, inheritances, property dispositions or selling a business – and are looking for different options when it comes to minimizing taxes and structuring their estate plan.

Taking care of immediate children is still very much a priority, but it’s not the only one. Some of their children are often already well off financially and many are retired themselves.

We are seeing more and more cases where grandparents are leaving money to grandchildren, but there should be extra caution and professional advice when structuring plans to transfer wealth. Income splitting can extend to grandchildren and can lower taxes as a family.

The following are a few examples of how we have assisted clients in helping out their grandchildren.

Outright Gift

The strategy of gifting money to adult grandchildren can be very tax smart. A person who is aged 65 or older may have government benefits such as Old Age Security clawed back if income exceeds certain thresholds set annually. In many cases income taxes can be reduced and government benefits increased by gifting funds to an adult grandchild in a lower income tax bracket. We do not recommend significant gifts to minor children directly as this could violate what is commonly known as the attribution rules.

Registered Education Savings Plan

For grandchildren under 19, grandparents should consider the Registered Education Savings Plan. This is a fantastic vehicle to tax-shelter money, income split with family members, and receive government grants. I’ve had clients set up an RESP for every grandchild they have. They require a consent form from the parents, as there is a limit to the Canada Education Savings Grant.

Tax Free Savings Account

For grandchildren who have reached the age of majority, giving funds to contribute to a Tax Free Savings Account can be an excellent way to income split. Your grandchildren can use this account to build up funds to use one day as a down payment on a home. By moving the funds from a grandparent’s taxable account to a non-tax account this will also reduce the family tax bill.

Paying Down Mortgages

Let’s assume you have the option of investing $100,000 into a two year guaranteed investment certificate or gifting these funds to your granddaughter who is paying 4.6 per cent on her mortgage. The $100,000 would result in $2,000 of interest income which would be fully taxable. If the grandparent was in the 30 per cent tax bracket then the government would receive $600 of this money. If you’re in a higher tax bracket, the amount would be higher and you would also be in the position of potentially losing even more government benefits. Your granddaughter is currently paying $4,600 annually in interest on her mortgage and is not able to deduct the interest costs. By gifting $100,000 the government would receive $600 less, you may receive more government benefits next year, and your daughter would save $4,600 a year in interest costs and also have a reduced mortgage.

Buying a Home

Buying a home is perhaps the toughest financial hurdle for most young people to clear, as salaries are insufficient for many to qualify to buy even a basic home. In one case, a grandmother considered moving into an assisted living arrangement. She had a grandson and two granddaughters, who wanted to purchase her home, which has a $600,000 value. The grandmother has significant pensions and capital outside of her principal residence and does not need the full proceeds from selling the home. During a meeting we mapped out a plan where she gifted each grandchild $100,000. The grandson could purchase the home from his grandmother for $500,000 ($600,000 fair market value less the $100,000 gift). The grandson would then be able to qualify for a mortgage for $500,000, the proceeds of which could be distributed as follows: $300,000 to grandmother and $100,000 to each granddaughter for them to each use towards the purchase of a home.

Insurance Products

In a small number of situations where people are wishing to keep certain gifts out of public record, an insurance product is a solution. By naming a specific beneficiary the insurance proceeds would bypass one’s estate and avoid probate fees. We have also seen situations where grandparents have taken out a second generation insurance policy to leave a significant gift to grandchildren.

What you should know about RESPs

The decision to open a Registered Educations Savings Plan is easy.  Every parent, who is financially able to, should open one to receive matching grants, tax-shelter investment income, and income split with a minor child.

We caution parents, however, to understand the different RESP options prior to setting one up.  The best way to understand an RESP account is to break down into three components – your original contribution; Canada Education Savings Grant (CESG); and investment income earned from Parts 1 and 2.

Decision Time

Parents need to also make three key decisions with respect to opening an RESP.

Determining the type of RESP account to open is the first decision to make.

There are different types of RESP accounts.  The two main types are self directed plans and pooled programs.  Our preference with any type of investment account is to keep things simple, low cost, and flexible.  This can all be achieved with the self-directed RESP option.  Pooled programs may require a minimum deposit, regular contributions, and have various up front and ongoing service fees.

We recommend anyone considering a pooled program to also explore the self directed option and compare both for fees and flexibility.  Too often we see people rushing out and purchasing a pooled RESP program without understanding all of the fees and features.

Many of the pooled options available have features that are unnecessarily complicated.   Whereever you initially open an RESP we feel you should have the right to move the RESP if you are not satisfied.  With many of the pooled options, it is very punitive to transfer out of the program.  Self-directed or pooled, we recommend opening a “family” plan rather than an “individual” plan, as it may provide greater flexibility in the future.

When to contribute to an RESP?

Many of the pooled programs have a required set dollar amount to be made at specified times.   The self directed option enables you to decide when you want to contribute and how much.  You can skip a year, or contribute more, depending on your financial situation. We feel this is important given the financial stress that many young families go through during the period of raising a family.

Age 15 is a key year that we look at when education planning for parents interested in receiving at least some of the CESG.  We recommend that parents contribute at least $2,000 to the RESP, or have made $100 annual payment for four years, before age 15.  If this is not done, then children are not eligible for the CESG even if contributions are made between the ages of 15 to 17.

There is often confusion around how much CESG may be carried forward if a contribution to an RESP is not made in a given year.  CESG amounts are able to be accumulated (beginning in 1998) until the end of the year in which a child turns 17 (subject to the special rule above).   This is good news for parents who were not able to start an RESP right away.

Unused CESG amounts can be carried forward for possible use in future years as follows:

  • 1998 to 2006: up to $400 is added to the grant room for each eligible child per year since 1998 (or since birth if the child was born after 1998)
  • 2007 or later: up to $500 is added to the grant room for each eligible child per year since 2007 (or since birth if the child was born after 2007)
  • The maximum annual RESP contribution is $5,000 that would receive the matching basic CESG of $1,000 (in other words, it is not possible to make one large lump sum at age 14 to receive the full CESG carry-forward)

For parents eager to begin contributing to an RESP to obtain the CESG we recommend contributing $2,500 per year for the first fourteen years and $1,000 in year fifteen.   This strategy enables the contributor to obtain the maximum grant amount of $7,200 ($36,000 x 20 per cent).

Another strategy is to combine the above (contributions over 15 years) “Early Strategy” with an addition contribution of $14,000.  Although the $14,000 would not attract the grant, the extra dollars invested would maximize the lifetime contribution limit of $50,000.

Parents who have children who are ten years old should begin an RESP immediately if they are looking to obtain the full $7,200 CESG from the government. 

To help parents determine the latest point at which they can begin contributing to an RESP, and still receive the full $7,200 in CESG, we have inserted the table below.   The table below makes the assumptions that the subscriber will be contributing the maximum amount possible that will attract the CESG (accept in the first year).

Child’s Age

Subscriber Contribution




























                 –                  –



* CESG above assumes only basic grant.  Additional grants may be available for low income families.  In some cases, parents can wait until age 11 if they are receiving grants beyond the basic CESG.

The table provides a catch-up strategy which involves contributing $1,000 when your child is 10 years old, and $5,000 (maximum yearly contribution amount eligible for matching CESG) in each year between age 11 and 17.    This strategy will enable you to still obtain the maximum amount of the government’s money ($7,200).

■ The last decision parents may need to make is the type of investments within the RESP.

In a pooled plan, contributions are combined by many parents and you do not have the flexibility with respect to the types of investments within the RESP. With a self directed option parents decide how to invest the savings and have more control.

Our advice with respect to overall investment strategy relates primarily to the age of the children.  The younger the children, the longer their time horizon is until post-secondary school begins, and the more risk an RESP may assume.  As the time horizon shrinks then the choice of investments should grow considerably more conservative.

The five years before school begins is what we refer to as the “risk zone” – this is when we recommend our clients begin shifting to lower risk investment options.

Pre-authorized contribution make sense

The easiest way to implement savings and investments into your routine is to set up a pre-authorized contribution – often referred to as a PAC.  Begin by looking at monthly cash-flows and determining a comfortable amount to set aside.

A PAC can be set up for most types of accounts – the most common being Registered Retirement Savings Plans, Registered Educated Savings Plans, Tax-Free Savings Accounts and non-registered accounts.

PACs can help individuals reach specific goals, such as retirement, education planning and emergency reserves.  If you are unsure of the savings required to reach each one of your goals, complete a financial plan with a list of savings required to meet your goals.

A typical financial plan may recommend that a couple each maximize annual TFSA and RRSP contributions, and save $500 per month in a non-registered savings account.

Dollar-cost averaging is used in finance to explain the purchase of the same investment on more than one day.  As an example, if you would like to purchase $20,000 of a particular stock but you feel it may be a bit expensive, one approach is to purchase a half position today at $10,000.  If the stock declines then you have the ability to buy $10,000 more without being overweight in the position.  By buying the stock on two different dates you are effectively dollar-cost averaging.

If you are contributing every month into a mutual fund then you are buying at different points in the market cycle.  For dollar-cost averaging to work it is important to continue contributions even if we are experiencing difficult financial markets.

Financial illustrations demonstrate the benefits of contributing early, even if those contributions are smaller.  The compounding effects of investment returns are an important component to consider when developing a savings strategy.

Decision 1:  How much can you afford to contribute?  Setting aside ten per cent of your monthly income may be a guideline to get some investors started.  It is important to look at your financial plan and available cash flows.  You can always start with a conservative amount and increase the dollar amount over time.

Decision 2:  How often would you like to contribute?  Most investors who establish a PAC contribute either once or twice a month.  We recommend that individuals consider their cash inflows and match the PAC accordingly.

Decision 3:  What type of investment would be most appropriate to set up as a PAC?   The three most common options are cash, high interest savings accounts, or a mutual fund.

Typically the people who contribute the amount as cash are looking to purchase individual holdings, once funds accumulate, rather than a mutual fund.  Some high interest savings accounts allow investors to set up a PAC.  If you choose to do a PAC in a mutual fund it is important to pick a quality fund and review this regularly.  Small PACs can turn into a significant nest egg over time if managed correctly. Some fund companies have policies where an initial purchase is required (i.e. $500) to establish a PAC.

Decision 4:  What type of an account would you like to set up a PAC for?  Many investors choose to PAC for their Registered Retirement Savings Account.  If an investor knows their maximum Registered Retirement Savings Plan deduction limit then a PAC can be set up to contribute one twelfth of this amount each month over the year.  Another example may be parents or grandparents who want to fund a RESP for a child or grandchild, through a monthly PAC.

One of the main reasons we like PACs is that it sets up forced savings.  With the amount automatically coming out of your bank account it also becomes part of a routine that is factored into your cash flows.  After a few months, some investors may even forget that they are saving automatically.


Parents should consider RESPs

Parents who want to save for their children’s education should look closely at Registered Education Savings Plans.  It beats putting money in a bank account or waiting until the tuition is due.

Parents will often choose to save for tuition by setting aside savings in a bank account because it is a simple option, not realizing all the facts.  One question we are asked regularly is, “What if my child does not pursue further education?”  We will answer this question and highlight the important changes to RESP accounts that were announced on March 19, 2007 by the federal government.

RESPs are registered accounts that enable you to make contributions now towards the cost of future education.   Unlike RRSP contributions, amounts put into an RESP are not tax deductible.  Investments within an RESP have the potential to grow and income is tax-sheltered until paid out to the beneficiary.  RESPs may be very attractive for those beneficiaries who qualify for the Canada Education Savings Grant.

Within an RESP account the total dollar amount generally includes three components – original contribution, Canada Education Savings Grant and investment income.

Contributors would be wise to understand these components and the recent legislation changes.

Original Contributions

Ottawa has eliminated the $4,000 annual contribution limit and has raised the lifetime contribution limit from $42,000 to $50,000.   As noted, the subscriber does not receive a tax deduction for your contribution.  If the beneficiary does not attend a qualifying educational institution then this amount may be returned to you without tax consequences, assuming the account has sufficient capital to do so.

Canada Education Savings Grant

The CESG grant was introduced in the 1998 federal budget, and the maximum amount has recently been increased from $400 to $500 for the 2007 taxation year.  The government now pays a grant of at least 20 per cent of the first $2,500 of annual contributions, directly into the qualifying beneficiary’s RESP.  Qualifying beneficiaries are generally below the age of 18 and may receive a lifetime maximum CESG totalling $7,200 per beneficiary.  Your child must have a social insurance number to receive the grant.  If a beneficiary does not attend a qualifying institution then the CESG must be paid back to the government.

Investment Income

What happens to any potential investment income that has been generated within the plan?  Previously the rules governing RESPs were onerous.  If the beneficiary did not attend a qualifying institution the investment return (interest, dividends and capital gains) went to the educational institution designated on the RESP contract.  The good news is that the Canada Revenue Agency has significantly modified the RESP rules and the termination options.  Subscribers may withdraw the investment income earned in the RESP if the following criteria are met:  (1) all beneficiaries named in the plan are at least 21 years old and are not eligible for education assistance payments, (2) contributor is a Canadian resident, and (3) RESP was opened at least ten years ago.

Investment income withdrawals are referred to as Accumulated Income Payments (AIP).  Provided the above three criteria are met, the AIP that has not been paid out to the beneficiary can be returned to the contributor by either: (1) transferring up to $50,000 to the contributor’s RRSP or a spousal RRSP (the contributor must have sufficient RRSP contribution room available) or (2) having it taxed in the contributor’s hands at their marginal rate plus an additional 20 per cent tax is levied, (3) donating the income to a post-secondary institution (no donation tax credit provided).

Self directed RESPs have flexibility with respect to the types of investments within the account.  In addition, if the beneficiary does not attend a qualifying institution then you have the three AIP options above.  All of these options are considerably better than losing the entire investment income amount.

An RESP has to be terminated on or before the last day of the twenty-fifth year after the year in which the plan was entered into.  The consequence of this deadline is similar to the beneficiary deciding not to pursue post-secondary education.

Rules are continually changing with respect to RESPs.  The recent changes in 2007 have resulted in several different strategies for funding education.  One strategy for children eligible for the CESG may be to contribute $2,500 per year for fourteen years and $1,000 in year fifteen.   This strategy enables the contributor to obtain the maximum grant amount of $7,200 ($36,000 x 20 per cent).  Another strategy is to combine the above (contributions over 15 years) with an additional contribution of $14,000.  Although the $14,000 would not attract the grant, the extra dollars invested would maximize the lifetime contribution limit of $50,000.

Individuals should always consult with their personal tax advisors before taking any action based upon these columns.


RESPs – Not just for kids

There are no age limits for Registered Eductation Savings Plans.  RESPs are often set up by adjult subscribers for the benefit of usual children or grandchildren.  But adults can name themselves as the subscriber and beneficiary. 

It is more common for individuals to change careers as a result of displacement or a desire to do something different.  In fact many are now working into their retirement years.  Furthering your education may allow you to pursue different opportunities that are both satisfying and rewarding.  The potential to increase your income may also be an attractive incentive.

An RESP is a great savings vehicle for adults planning to go back to school, couples with different income levels wishing to split income and investors wishing to defer investment income.

RESPs for Adults

The steps for opening a non-family adult RESP is very similar to opening an RESP for an individual child or family RESP.  You simply name yourself both the subscriber and the beneficiary.  Individuals may contribute up to $4,000 annually ($42,000 maximum contributions to the plan). Unfortunately adults are not eligible for the Canada Educations Savings Grant.  The following outlines why RESPs for adults are still worth considering for some.

Comparing RESPs to RRSPs

Both RESPs and RRSPs provide tax deferral benefits.   While similar in many respects, the following highlights the main differences:

  • RESP contributions are not deductible, where RRSP contributions are deductible
  • RESP contributors may withdraw their original capital at any time with no tax consequences, whereas withdrawals from an RRSP/RRIF are generally considered taxable income
  • RESPs must be terminated within 26 years after plan start date and individuals are not forced to withdraw funds after age 69; with an RRSP you must convert to a RRIF at age 69 and begin taking payments at age 70.

Withdrawing Income

The easiest way to withdraw income generated in the RESP is to be enrolled in a qualified post secondary institution.  After enrolment you may begin receiving Educational Assistance Payments (EAP).  In RESPs for adults, an EAP is a distribution of the accumulated investment income that is taxed in the beneficiary’s hands the year in which it is received.  Adults are not eligible for the Canada Education Saving Grant.  The EAP includes income only and no Grant portion.

Enrolling in School

In order for a beneficiary to qualify for an EAP the individual must be enrolled in a post-secondary program at a qualifying educational institution.  For institutions within Canada the program needs to be at a minimum ten hours a week for three consecutive weeks.  For institutions outside of Canada, the minimum is increased to 13 consecutive weeks.   The amount of the EAP is limited to the lesser of $5,000 and the actual expenses for the first 13 consecutive weeks.  There are no limits on the dollar amount of the EAP after 13 weeks.

Failure to Enroll

An individual may withdraw their original capital at any time with no tax consequences.  If not enrolled at a qualifying institution within ten years the individual can qualify for an Accumulated Income Payment (AIP) that represents the investment earnings in the RESP.  An AIP withdrawal is subject to a penalty tax of 20% in addition to the taxes payable when taken into income.  Other rules relating to the termination of the RESP after the first AIP payment also apply.  Individuals with RRSP contribution room available have an option to transfer up to $50,000 into their RRSP or to a spousal RRSP. This option avoids the 20% penalty tax and may provide a unique income splitting opportunity.

Interesting Points to Consider

Although the 20% penalty may be a determent for some, we feel it shouldn’t be.  Finding an economical course that lasts more than 13 consecutive weeks is an easy way to avoid the penalty.  The following are some interesting points to consider:

  • Correspondence courses qualify
  • Individuals are eligible for the EAP regardless of whether they attend classes
  • Individuals are eligible for the EAP even if they do not successfully complete the course
  • Individuals may be eligible for education and tuition tax credits

RESPs are not just for your children.  In fact, it might be your gateway to an exciting new career!


Education can be costly

The Cost of Raising a Child

The greatest cost in raising children may potentially be the cost of education.  There are several ways to fund a child’s post secondary education.  One way might be to anticipate that a child will receive scholarships or use student loans, while other parents may decide to pay as they go.

Whichever method parents choose to assist their children it is important to keep a mental note of the potential costs for budgeting your cash flows.  Like all plans, your future costs should also factor in the unexpected.  An unanticipated disability, death, divorce or other family emergency may interfere with your children obtaining an education.  In many cases purchasing adequate insurance may offset some of the risk if a supporting spouse were to become disabled, suffer a critical illness or pass away.

Today, many young parents are struggling to make ends meet.  Paying the household bills, including the mortgage leaves little left over for education planning.  Contributing to RRSPs provides a deduction from taxable income whereas RESPs do not provide this immediate tax relief.  Last week we discussed the basics of RESPs and the following outlines a few points to consider when looking at an RESP for a child.

Attribution Rules:  Normally, when you give your minor child money, interest or dividends earned on this money is taxed as if you had received the income (i.e. income is attributed back to the parent and taxed in their hands).  Capital gains income does not attribute back to the parents.  The attribution rules do not apply to RESP contributions.

Planning Contributions:  It may be very difficult for parents to contribute $2,000 every year.  Although the compounding component to investment returns is important, it is only one factor to consider.  Contributing a smaller amount, say $1,000 beginning immediately, is one option.  Another option may be to wait until your child is older and then contribute a greater amount, up to the yearly maximum of $4,000.  Both possibilities enable you to take advantage of the Canada Education Savings Grant (CESG).

Pre-Authorized Contributions:  Setting up a monthly pre-authorized contribution (PAC) is often the easiest way for a family to get started with investing.  Benefits of a PAC include dollar-cost averaging and the benefits of compounding over the long term.  Every month the CESG is paid based on a minimum of 20 per cent of the preceding months contributions.  Some financial institutions may not have systems in place to administer frequent contributions to RESPs.  The timing of the CESG payment may differ between financial institutions.

CESG:  The CESG is at least 20 per cent of contributions to a maximum of $4,000 annually or a lifetime total benefit of $7,200.  Utililizing the $7,200 CESG is a prudent move as this investment effectively provides a minimum 20% return upon contribution into the plan.  Although individuals may make a lifetime contribution up to $42,000 into an RESP they are effectively only obtaining the grant on the first $36,000.  If you multiply $36,000 x 20% you obtain the maximum CESG of $7,200.  The CESG makes RESPs for children very attractive.  Contributions over $36,000 are less appealing.

Grandparents:  Many grandparents are proud to start the next generation off on the right foot.  Funding an RESP is a great way to help both their children and grandchildren.  Godparents, friends and other family members may also be the subscriber of an RESP for a child.

Individual vs Family:  An individual plan is set up for the benefit of one person. A family plan is set up to allow contributions to be made for more than one beneficiary. The one condition is that all the beneficiaries must be related to the contributor(s) by blood, but not nieces or nephews.  Contributors decide on how the plan’s assets are invested along with the timing and amount of the education payments. The main benefit of a family plan is that RESP income does not have to be paid out proportionately between beneficiaries. If one child does not pursue post-secondary education, the other beneficiaries may use the income for their education.

Student Tax Initiatives:  The 2006 federal budget contained a number of proposed changes to personal income tax, some of which affect students.  For 2006 and future years, a non-refundable textbook tax credit will be introduced for post-secondary students.  The credit will be calculated with reference to the lowest personal tax rate and will be in addition to the current education tax credit.  Textbook tax credits are able to be carried forward and have the same transfer rules as tuition and the education tax credit.  For 2006 and subsequent years scholarship, fellowship and bursary income will be fully exempt from tax with respect to post-secondary education and occupational training.

The First Step:  In order to get started with an RESP today, a child needs to request a social insurance number.  An excellent source for information is which includes information for parents.  The Human Resources and Social Development (HRSD) website at also provides detailed information on obtaining a SIN for the first time.  The website enables you to download a current SIN application form.  To locate an office near where you live to pick up and/or drop off forms call 1-800-OCanada (1-800-622-6232).

Applying in person, rather than mailing the application, may be faster and more convenient.  Another benefit of applying in person is that you are not required to part with your identification documents because your identification is verified at that time.  If you obtain an application form from another source or financial institution, you should ensure that the form is current.  The application process normally takes three to four weeks before you receive the physical card provided that your application meets all criteria.  In extenuating circumstances, a SIN may be obtained verbally in a shorter period with the physical card to follow at a later date.

With the combination of tax sheltering and the CESG, an RESP may play an important role in your family’s education savings strategy.

RESP 101 – It pays to gain RESP education

What is an RESP?  Registered Education Savings Plans are registered accounts that enable you to make contributions now towards the cost of future education.   Unlike an RRSP, your contributions are not tax deductible.  Investments within an RESP have the potential to grow and income is tax-sheltered until paid out to the beneficiary.  RESPs may be very attractive for those beneficiaries who qualify for the Canada Education Savings Grant.

The Good News: Previously the rules governing an RESP were onerous. If the beneficiary did not attend a qualifying institution (i.e. college or university), any growth, interest, dividends and capital gains went to the educational institution that was designated on your RESP contract.  The good news is that the Canada Revenue Agency has significantly modified the RESP rules. In addition to the tax advantages, there are increased savings limits and additional termination options.

General Rules:  Although contributions to an RESP are not tax deductible, any income within the plan compounds on a tax deferred basis. Furthermore, when the accumulated income is withdrawn from the plan to pay for education expenses, the student pays the taxes, not the contributor.  In most cases, this income would attract little tax because the student’s basic personal exemption along with tuition and education credits help to offset the tax liability.  Any individual can set up an RESP including grandparents, aunts, uncles, godparents and friends.

Contributions:  These plans allow the contributor (called a subscriber) to deposit any amount up to $4,000 annually per beneficiary.  Contributions may be made for up to 21 years following the year in which the plan is entered into, to a lifetime maximum of $42,000 per beneficiary. If these limits are exceeded, a one per cent per month penalty tax is charged until the over-contributed amount is withdrawn from the plan.

Canada Education Savings Grant (CESG):  The CESG grant was introduced in the 1998 federal budget.  Currently, beneficiaries are not required to have an existing RESP to accumulate CESG contribution room. Under this program the Government of Canada pays a grant of at least 20 per cent of the first $2,000 of annual contributions, directly into the qualifying beneficiary’s RESP.  Qualifying beneficiaries are generally below the age of 18 and may receive a lifetime maximum CESG totaling $7,200 per beneficiary.  Contributions for beneficiaries aged 16 and 17 will only receive a CESG subject to certain stipulations. CESG room may be carried forward until the beneficiary turns 18.  Beneficiaries must have a social insurance number to receive the CESG.  If contributions are not made to the plan then the CESG contribution room may be carried forward and used when RESP contributions are made in future years.

Education Assistance Payments (EAP):  Once the beneficiary of an RESP is enrolled in a qualified school, education assistance payments may commence.  Any income or growth earned within the plan may be paid out to the beneficiary once they are attending a recognized post-secondary institution.  EAPs are taxed in the hands of the beneficiary, who reports it as “other income” on their tax return.

No Post Secondary?  If the beneficiary of the RESP does not proceed with post secondary education, the contributions are returned to the contributor with no tax consequences and the CESG, if applicable, is returned to the government. Contributors may withdraw the income earned in the RESP if the following criteria are met:  (1) all beneficiaries named in the plan are at least 21 year old and are not eligible for EAP payments; (2) contributor is a Canadian resident and ;(3) RESP was opened at least ten years ago.   These income withdrawals are referred to as Accumulated Income Payments.

Accumulated Income Payment (AIP):  Provided the above three criteria are met, the Accumulated Income Payment that has not been paid out to the beneficiary can be returned to the contributor by either: (1) transferring up to $50,000 to the contributor’s RRSP or a spousal RRSP (the contributor must have sufficient RRSP contribution room available);(2) having it taxed in the contributor’s hands at their marginal rate plus an additional 20% tax is levied; (3) donating the income to a post-secondary institution (no donation tax credit provided).

Maturity:  An RESP has to be terminated on or before the last day of the twenty-fifth year after the year in which the plan was entered into.  The consequence of this deadline is similar to the beneficiary deciding not to pursue post-secondary education.  All contributions will be returned tax-free to the contributor and the CESG repaid to the government.  Any income that has not been paid out to the beneficiary must be returned to the contributor as an AIP.

An RESP is one of several vehicles individuals may choose to help fund post secondary education.  Rules are continually changing with respect to RESPs.  Individuals should always consult with their personal tax advisors before taking any action based upon these columns.