Future Generation Education Expenses

 Do you wish to contribute financially to your future grandchildren's education expenses? Many of us would like to help fund private school or post-secondary schooling, but it can be difficult if we don't know exactly how many grandchildren there might be, and when they might be born. Here are a number of options that you may wish to consider.

1. Make an outright gift

You can take the "wait and see" approach and pay your grandchildren's expenses as they arise. This lets you assess each grandchild's individual situation while still keeping the assets in your name. If you pay tuition fees directly to an educational institute, there will be no income attribution concerns. However, if you plan to give money directly to a grandchild under 18 years of age and that money subsequently earns interest or other investment income, the tax liability may be attributed back to you. Financial gifts to grandchildren age of 18 and over will not be attributed back to you, and will be taxed at the child's presumably lower rate of taxation. If the child uses the money to pay tuition, they may also be able to transfer unused tuition and education tax credits to a parent or to you. The outright gift approach makes sense for private school tuition fees, since RESPs can only be used to fund post-secondary education.

2. Contribute to a Registered Education Savings Plan (RESP)

 Once the grandchildren are born, you can apply for a Social Insurance Number for them, and open an RESP. Although contributions to a registered education savings plan are not tax deductible, there is a tax deferral opportunity as the contributions accumulate tax-free within the plan. Upon withdrawal, the payments will be taxable in the hands of your grandchild, provided that your grandchild is enrolled full-time or part-time in a qualifying educational program at a qualifying post-secondary educational institution.  Your grandchild will likely be in a lower tax bracket than you at the time of withdrawal, and will be able to offset some of the tax liability with tuition and education tax credits, lowering the overall tax burden on these funds.

There are individual plans and family plans.

In an individual plan, the subscriber can be anyone (no need for a blood or adoption relationship), but there can only be one beneficiary. In a family plan, the subscriber can only be a parent or grandparent, and you can have multiple beneficiaries as long as they are related to the subscriber byblood or adoption.

The total lifetime maximum of RESP contribution is $50,000.

Contributions to a beneficiary in an individual plan may be made for up to 31 years after the plan is established. For example, if an individual plan is opened in the year 2000, the last contribution date is December 31, 2031. Contributions to a beneficiary in a family plan may only be made until the date the beneficiary turns 31 years of age. The plan must be closed by December 31st of the 35th year after being opened, eg. an RESP opened in May 2000 must be terminated by December 31st, 2035. A penalty of 1% per month is imposed on excess contributions for each month they remain in the plan.

Your capital contributions can be withdrawn at any time; however, you cannot withdraw the income of the RESP without tax consequences. For an RESP beneficiary who qualifies for disability tax credit termination date of RESP has been extended from 35 to 40 years. Under the Canada Education Savings Grant (CESG) program, the federal government will pay a grant of 20% on the first $2,500 of your annual contributions. The maximum annual grant of $500 is payable for each year the beneficiary is under the age of 18 to a maximum of $7,200 per beneficiary.

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries.