recent study by TD Canada Trust indi-cates that 87 per cent of parents planto cover, in part or in whole, thecosts of their children’s post-sec-ondary education. However, thesame study also revealed that 26per cent have no education sav-

ings in place, and another 15 per cent have no ideawhatsoever about how they are going to finance theirchildren’s education. How exactly do your clients planto cover the increasing costs of education?

New RealitiesThe cost of post-secondary education continues torise, placing more and more pressure on students andparents. In fact, over the last two decades, the averagecost of tuition in Canada has more than tripled.Statistics Canada tells us that undergraduate studentspaid an average of $4,917 in tuition fees for the 2009-

2010 academic year, more than three times the averageof $1,464 in 1990-1991.Of course, these are the numbers for the average

cost of tuition today. Children born in 2010 will nodoubt face another new reality by the time they enrol— an estimated cost of $85,734 for a typical four-yearpost-secondary education program. Tack on room andboard for students attending school away from homeand that cost could rise to $136,186.How will families manage these expenses?

The ABCs of RESPsThe primary education savings vehicle in Canada isthe Registered Education Savings Plan (RESP). Unlikewith an RRSP, contributions to an RESP are non-deductible for tax purposes. However, eligible contri-butions can earn a 20 per cent grant from the govern-ment via the Canada Education Savings Grant(CESG). Furthermore, all investment returns — interest,

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LearningIt’s back-to-school season again — the perfect time to talk to yourclients about how they plan to fund their children’s post-secondaryeducation. As the cost of tuition continues to rise, the RESP islikely the answer to how clients will manage these expenses. AsMichael Callahan reports, recent changes to the contributionrules present new strategies for optimizing RESPs that were pre-viously unavailable

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dividends and capital gains — inside the RESP are tax-free.Let’s take a closer look at RESP contributions, withdrawals

and the different types of RESP plans available.

RESP ContributionThere have been significant changes to the rules governing RESPcontributions over the past few years. As of 2010, the RESP con-tribution rules are as follows:• In order to open an RESP and be eligible for the CESG, each child must be a Canadian resident with a valid Social Insurance Number (SIN).• Total lifetime RESP contribution limit is $50,000 per beneficiary.Note that the annual contribution limit has been removed. For example, it is now possible to contribute the entire $50,000 in year one.• RESP contributions are non-deductible for tax purposes.• Each child accrues $2,500 in “grant-eligible” contribution room each year starting in 2007. For years prior to 2007, only $2,000 of grant-eligible contribution room is accrued.• All grant-eligible contributions are entitled to receive a 20 per cent CESG. Note that lower income families may be entitled to a larger grant, subject to certain criteria.• Contributions in excess of the grant-eligible contribution room are permitted (provided the total $50,000 contribution limit hasn’t been reached); however, excess contributions will not be entitled to receive the CESG.• Maximum lifetime CESG limit is $7,200 per beneficiary.• RESP beneficiaries are eligible to receive $500 in CESG per year, up to and including the year in which they turn 17.• Only one previous year’s worth of grant-eligible contribution room can be carried forward to the current calendar year. In other words, the maximum amount of grant that can be received in any given year is the amount allocated for the currentyear plus the unused amount from a previous year.• The maximum age for RESP contribution is:• Individual plan — up to and including the 21st year of the plan’s existence• Family plan — contributions for each beneficiary must be made before the beneficiary reaches age 22

• CESG age restrictions: Contributions made after the year in which the beneficiary turns 17 are not CESG eligible. In addition,for the years when the beneficiary is age 16 or 17, CESG pay-ments are dependent on at least one of the following conditions:• A minimum of $2,000 in RESP contributions must have been made before the year in which the beneficiary turns 16; or• A minimum of $100 in annual RESP contributions must have been made in any four years before the year the beneficiary turns 16.

IllustrationsLet’s explore a couple of examples to see exactly how RESP con-tributions work in different scenarios.

Example: Kristin was born in 2008, but her parents did notopen an RESP account for her until 2010. How much should

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they put into the RESP in order to maximize the CESG for cur-rent and future years?Grant-eligible contribution room is $2,500 for each year

from 2008 to 2010. Therefore, the total grant-eligible contributionroom is $7,500. We have to keep in mind, however, that only oneprevious year’s worth of grant-eligible contribution room can becarried forward to the current or any future year. In order to max-imize the CESG, Kristin’s parents could contribute as follows:

• 2010— $5,000, which is the grant-eligible room for the cur-rent year, plus carryover from 2008. The 20 per cent matchingCESG would be an additional $1,000.

• 2011— similar to 2010, they contribute $5,000, which is thegrant-eligible room for the current year, plus carryover from2009. The 20 per cent matching CESG would again be an addi-tional $1,000.

• 2012— $2,500, as there is no additional grant-eligible roomto be carried forward. All future years would be the same as thisyear. CESG match at 20 per cent would be $500.

Example: Michael was born in 2009 and his parents set up anRESP for him in that year, although they did not make a contri-bution. Michael’s parents, who have substantial savings, decidethey want to contribute the maximum amount to his RESP in2010. How much can they contribute? And how much CESG willthey receive?

Over the last two decades, the average cost of tuition in Canada has more than tripled.

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Strategy 2: Initial lump sum$50,000 RESP contribution in year one, with no subsequent con-tribution. The lifetime contribution limit of $50,000 will enjoy18 years of tax-free growth; however, after the initial CESG of$500 received in year one, there will be no further CESG. Theresulting balance after year 18 is $144,144.13.

Strategy 3: CombinationContribute a $16,500 lump sum in year one, $2,500 in years twothrough 14 and $1,000 in year 15. This ensures the CESG ismaximized as soon as possible and the total contributed to theplan is, again, $50,000. The resulting balance after year 18 is$125,844.42.

Although it appears the compounding of an initial $50,000 con-tribution outweighs the benefits of CESG payments in subsequentyears, there are other considerations. In particular, this strategyassumes the client actually has a $50,000 lump sum available forcontribution. If this were the case, there would also be the optionof proceeding in accordance with one of the other strategies whileinvesting the remaining balance in a non-registered account.However, this strategy would involve many other external consid-erations such as marginal tax rates and the nature of the invest-ments (capital gains, dividends or interest) in order to achieve ameaningful after-tax rate of return in non-registered accounts. Forsimplicity, we have focused on the activity inside the RESP.In addition, we must keep in mind that although the mathe-

matics may dictate a particular course of action, RESP savingsstrategies will often be governed by the client’s financial means.Therefore, advisors must work with each client to determine thebest solution for their own unique goals and circumstances.

RESP WithdrawalUltimately, when the beneficiary is ready to go to school, moneymust be withdrawn from the RESP account. Now that we’veexamined the rules and possible strategies surrounding RESPcontributions, let’s take a closer look at the withdrawal process.

Michael’s parents can contribute the entire lifetime contribu-tion limit of $50,000 in 2010. This would give them $1,000 inCESG, as there is a total of $5,000 in grant-eligible room ($2,500from 2010 and an additional $2,500 carryover from 2009). Notethat this strategy would not allow for any future RESP contribu-tions and therefore no additional CESG.

RESP Contribution StrategiesRecent changes to RESP contribution rules present new strate-gies that were previously unavailable, and may therefore affecthow your clients plan to save. In particular, the removal of theannual limit presents clients with the option of contributing theentire lifetime limit at once. Doing so, however, would meanforfeiting CESG in future years. So, does the tax-free com-pounding of an initial lump sum outweigh the benefits of col-lecting subsequent CESG contributions? Is it better to receivethe maximum CESG each year? Or perhaps some combinationof both?Let’s explore each of these possibilities. The following are

assumptions for all scenarios: • Six per cent annual return• Contributions begin in year child is born, so catch-up provision is not available• Contributions are made at the beginning of each year• Total RESP contribution is $50,000

What is the value after 18 years?

Strategy 1: Maximize CESGContribute $2,777.78 annually for years one through 18. Thetotal contributed to the RESP is $50,000 and the total CESGreceived is $7,200. Note that the CESG could be maximized withan annual contribution of $2,500, but this would result in a totalcontribution of only $45,000 after 18 years. Therefore, the annu-al contribution is set constant at $2,777.78 in order to achieve alifetime contribution of $50,000. The resulting balance after year18 is $105,313.99.

The removal of the annualcontribution limit presentsclients with the option of contributing the entire lifetime limit at once. Doing so, however, wouldmean forfeiting CESG in future years.

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First, we must note a distinction in the two “types” of moneyin an RESP account: contributions and accumulated income.Contributions are the actual dollars contributed by the subscriber,while accumulated income is everything else — CESG, interest,dividends and capital gains. Accumulated income received by thebeneficiary is called an “Educational Assistance Payment (EAP). ”This distinction is important for tax reasons, as explained in theRESP withdrawal rules below:• To withdraw money from an RESP, proof that the beneficiary is attending an approved post-secondary school must be provided. Receipts for specific purchases are not required.• RESP contributions are withdrawn tax-free.• EAPs are taxable in the hands of the beneficiary upon withdrawal. • A maximum of $5,000 accumulated income can be withdrawn in the first 13 weeks.• An RESP can remain open for a maximum of 36 years.• If the beneficiary does not attend a qualifying post-secondary program:• contributions may be withdrawn by the subscriber tax-free;• CESG must be repaid to the government;• all remaining funds can be withdrawn by the subscriber as an “Accumulated Income Payment (AIP)”; and• AIPs are taxable at the subscriber’s marginal tax rate, plus an additional 20 per cent tax is levied.

CANADA LEARNING BONDThe Canada Learning Bond (CLB) is an additionalgrant offered by the Government of Canada tohelp low- and modest-income families save forpost-secondary education. Note that unlike theCESG, subscriber contributions to an RESP are not required for the CLB.

The CLB consists of:• an initial grant of $500; and• subsequent grants of $100 per year,

up to the year the beneficiary turns 15.

To qualify for the CLB:• the beneficiary must have been born after

December 31, 2003; and• the subscriber must be in receipt of the

National Child Benefit Supplement as part of the Canada Child Tax Benefit, which is often referred to as “family allowance” or “baby bonus.”

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RESP Withdrawal StrategiesAlthough much of the RESP withdrawal process will be dictatedby the needs of the beneficiary (student), here are a few tips:

Avoid paybacks with the proper withdrawals.CESG money remaining in the plan after the beneficiary hascompleted (or otherwise left) the post-secondary education pro-gram must be paid back to the government. Therefore, in orderto avoid a potential CESG payback, be sure to withdraw as muchaccumulated income (as EAP payments) as possible before with-drawing contributions.

Save taxes by income splitting. The RESP provides somewhat of an income-splitting opportu-nity. In particular, RESP withdrawals are taxed in the hands ofthe beneficiary, not the subscriber. Students are entitled to thebasic personal income tax exemption as well as tuition tax cred-its, which can help lower their tax bills. In many cases, thismeans that all withdrawals could effectively be tax-free becausestudents often have little to no income from other sources.

Take advantage of leftover contributions.It is possible to have a significant balance remaining in the RESPafter the beneficiary has completed post-secondary education.Any contributions remaining in the RESP can then be withdrawnwith no tax consequence whatsoever. Clients who find themselvesin this fortunate situation can use the leftover contributions asthey see fit.

Don’t collapse the plan too early.If the beneficiary decides not to attend a qualifying educationprogram, the RESP must eventually be collapsed. However, it’squite possible that children who decide to pursue other avenuesmay decide to go back to school at a later point. Therefore, col-lapsing the plan early could turn out to be a mistake, as themoney may be needed later for tuition and other related school-ing expenses.

Choosing The Right PlanOne important decision clients will have to make is the type ofRESP plan they wish to open: individual or family. While thereare benefits to each, the client’s own personal situation will oftendetermine which plan is more appropriate.

Individual Plan• An individual plan can have only one named beneficiary. • The beneficiary can be any individual named by the subscriber, including the subscriber.• CESG can only be paid to beneficiaries under the age of 18.• The last possible contribution date is the end of the 21st year of the plan’s existence.• The beneficiary on the account can be replaced by anyone else. However, if the new beneficiary is not a blood relation of the subscriber, any CESG received has to be repaid to the government.

Family Plan• A family plan can have one or more beneficiaries.• The beneficiaries must be related — children, grandchildren, or adopted children.• For plans with multiple beneficiaries, contributions must be allocated to each beneficiary, although not necessarily in equal weighting. • Plan beneficiaries can be removed or added at any time during the life of the plan.In general, an individual plan may be more appropriate for

clients who want to save for a child who is not related, whereas afamily plan may work better for clients who have more than onechild.Although there are other methods of saving available, the

RESP is the vehicle of choice when it comes to education savings.It’s therefore important that advisors have a sound understand-ing of RESPs so they can offer effective advice and guidance.Furthermore, communicating the importance of educationplanning can help ensure that clients are better prepared to man-age the costs of their children’s post-secondary education, whilestrengthening the advisor-client relationship.

MICHAEL CALLAHAN can be reached at callahan_michael@yahoo.com.

Communicating the importance of education

planning can help ensure yourclients are better prepared to manage the costs of their children’s post-secondary

education, while strengtheningadvisor-client relationships.