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EDUCATION:
A GOOD
THE BEST INVESTMENT
A summary of your options
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Page 1
TABLE OF CONTENTS
1 A Good Education: The Best Investment
2
2 Paying For Education: Three Ways to Get There
4
3 Investing Today for The Future
6
Option 1: The Education Savings Plan
How Education Savings Plans Work
The Canada Education Savings Grant
Types of Education Savings Plans
Education Savings Plans: You Were Asking?
Tips for Education Savings Plans
Education Savings Plans: Multiple Choice
7
7
8
9
10
13
13
Option 2: “In Trust” Accounts
“In Trust” Accounts: The Tax Advantages
Setting Up an “In Trust” Account
Formal vs. Informal Trusts
“In Trust” Accounts: You Were Asking?
Tips for “In Trust” Accounts
15
15
16
16
17
18
4 How Much Is Enough?
19
5 A Final Comparison
20
1
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A Good Education:
The Best Investment
1
A Good Education:
The Best Investment
How important is a post-secondary education to your children or grandchildren? Consider
The Essay on Education Necessitates Action One Knowledge Good
"You cannot teach a man anything; you can only help him find it within himself." -Galileo Can a United States president, a Greek philosopher, an influential astronomer, and world-class author disagree on a single, seemingly simple topic? One that is ever present in the everyday life of all throughout the world? How can names like Aristotle, Emerson, Galileo, and Garfield disagree on such a topic ...
that the Canadian government itself has said that, by the year 2000, a full 65 percent of
all new jobs in Canada will require a post-secondary education.1 With statistics like these,
it’s no secret that children today, more than ever, will have to look to formal education to
make it in the real world.
And education doesn’t come cheaply.
In 1988, roughly $1,300 would cover
the annual tuition for one year of
post-secondary studies. Today, just
ten years later, those tuition fees
have more than doubled, to over
$3,000. The truth is, tuition costs have
increased at a pace more than 5 percent above general price inflation over
the last decade. With government
spending reaching new lows, you can
count on education costs to continue
increasing at a rate rivaled by little else.
The bottom line? You can expect four
years of post-secondary education,
which currently costs about $49,000 2
(including tuition, books, room and
board, and other costs), to cost upwards
of $120,000 in 18 years’ time. It’s going
to take some work to pay for these
costs – and make no mistake, your child
or grandchild will need your help. Not
to worry. With some planning ahead
of time, educating your child or
grandchild can be as easy as 1-2-3.
1
2
2
Source: Agenda Jobs and Growth: A New
Framework for Economic Policy, Federal
Department of Finance, October, 1994.
Source: Canadian Federation of Students.
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Education:
st Investment
The Rising
Cost of Tuition
vs. Inflation
Price index /
Base of $100 in 1988
$1,500
$1,200
$900
$600
$300
0
Year
1988
1992
1996
Tuition
Increases
2004
2008
2012
2016
Inflation (Consumer
Price Index)
SOURCE: Statistics Canada.
Figures for 1998-2016 forecast an annual increase
The Term Paper on The Rising Cost Of College Tuition
On the day of high school graduation, almost every student has the same dream: to have a great job that pays six figures, full benefits, and enough vacation time to cover an annual trip to Europe. However, we no longer live in a society where this dream will be made into a reality with a meager high school diploma. Instead, students need to continue their education for another four years, at the ...
of 9.06%. Tuition costs
increased, on average,
9.06% annually between
1987 and 1997 according
to Statistics Canada.
2000
SOURCE: Statistics Canada.
Inflation represented by
increases in the Consumer
Price Index. Figures for
1998-2016 are forecasts at
an annual increase of 3%.
3
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Paying for Education:
Three Ways to Get There
2
Paying For Education:
Three Ways to Get There
Finding the money to assist your children with their education can seem like a daunting
task. When it comes to paying for this essential head start in life, you have three options:
pay as you go, pay later or pay now.
1. Pay As You Go
Paying as you go could mean writing a
cheque for as much as $30,000 each
year that your child attends college or
university, depending on how old he
or she is today – not exactly an appealing prospect! Paying as you go could
mean that you will have to sacrifice
other lifestyle expenditures to make
those educational payments. Can you
afford to cut your annual expenses by
such a hefty sum for the duration of
your child’s post-secondary education?
Very few of us could manage payments
of this magnitude.
2. Pay Later
Paying later means taking advantage
of student loan programs offered by
various levels of government as well
as by some post-secondary educational
institutions. It may also mean borrowing from a financial institution to
meet the costs of education. However,
the huge debt load resulting from
borrowing to pay for four or five years
of post-secondary education will be a
very heavy burden for any graduate
just entering the labour force. In fact,
the average student debt load for a
graduate of a four-year post-secondary
education program in 1990 was $13,000.
This figure has since risen to $25,000!1
And considering that your child will
have to pay accrued interest as well,
paying later actually means paying
The Essay on Discuss About the Duty of Paying Taxes
Paying taxes has become a compulsory obligation of each citizen for a long time but in recent years, there have some heated debates with many people believing that paying taxes is a work expressing adequately their responsibilities with society. While others clam that it is not enough to become a good citizen. First and foremost, paying taxes is very essential with society. Firstly, taxes is a ...
significantly more.
3. Pay Now
The most sensible option is to pay now
– to put money aside today while your
children are still learning their ABCs –
and to invest that money wisely so that
it grows during the time that remains
before the tuition bills start rolling in.
By paying now and allowing compounding to work its magic, your child’s postsecondary education will represent a
much smaller out-of-pocket outlay.
Whether you are looking to provide
for all or just a portion of your child’s
education costs, the earlier you start
the investing process, the more likely
you are to be successful in providing
that help. The key is to start investing
today for the future.
1
4
Source: The Canadian Opportunities Strategy,
Federal Department of Finance, February, 1998.
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for Education:
ays to Get There
Compare
the Value of
$100 Invested
Monthly
Age of child at
beginning of monthly
savings program
Ten
Seven
Five
NOTES:
1. Assumes investment growth of 8%
per annum, compounded monthly.
2. Contributions are made monthly
until child is age 18.
3. All figures are before taxes.
Two
Newborn
$10,000
Total capital invested
$20,000
$30,000
$40,000
$50,000
Growth on capital
5
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3
Investing Today for the Fu
Investing Today for the Future
Investing today for the future education of your child or grandchild will pay big dividends
later when it comes to writing those cheques for tuition, books, room and board, and other
expenses. But let’s face it, the tax collector can make your job tough. In fact, if you put your
savings in a regular bank or investment account, up to half your returns will be lost to
taxation – which means you’ll have to more than double the amount you set aside to
The Essay on Children Education 2
1a) The Department for Education was formed on 12th May 2010 and is responsible for education and children’s services. b) Its main priorities are: Drawing up education policy e.g. setting the National Curriculum Cutting unnecessary burdens to give professionals the freedom and autonomy they need to get on with their jobs Develop the quality of services available to children(SHEEP) Developing the ...
meet future education expenses.
What about simply putting money
into an account registered in your
child’s name? Granted, your child’s
marginal tax rate is probably a good
deal lower than your own, but tax
authorities have all but closed the
door on this option. Attribution rules
apply to investment income – meaning
that all simple interest and dividend
income earned on money you give to
your minor child and invest in his or
her name will be taxed in your hands
at your marginal tax rate. The same is
true if you lend your child money for
no consideration, or at an interest rate
below Revenue Canada’s prescribed rate.
Income attribution applies to such
transfers between any non-arm’s length
persons and a child, and that includes
parents, grandparents, aunts, uncles,
siblings and spouses. These attribution
rules eliminate a good part of the tax
advantage you might hope to obtain
by going this route.
Fortunately, there is a solution to this
dilemma; or, to be more exact, two
solutions: the Education Savings Plan,
and the “in trust” account. The following is an explanation of these two
tax-effective ways of saving for your
child’s post-secondary education.
6
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ng Today for the Future
Option 1:
The Education
Savings Plan
Option 1
In the past, Education Savings Plans (ESPs) were looked upon
by many as an ineffective way to save for an education. But
things have changed – significantly. Since 1996, our government
has been changing how ESPs work, and today these plans are more flexible than ever.
Are ESPs worth a second look? You bet.
How Education Savings Plans Work
An ESP is simply a trust with three parties: the subscriber, the beneficiary
and the plan sponsor. The subscriber is
the person, typically you as a parent or
grandparent, who contributes capital
to the ESP. The beneficiary, usually
your child or grandchild, is the person
of your choice who, upon enrolling in
The Essay on Summarise Entitlement and Provision for Early Years Education 2
Since 2004 local education authorities, funded by the government ensured that every child in the UK aged three and four years old have been entitled to free places at nursery or another preschool setting (including childminders). From 1st September 2010 the Government extended these hours from 12. 5 to 15 hours for up to 38 weeks of the year. The free entitlement provides universal access to early ...
a qualifying post-secondary program,
will receive the investment returns
earned by your contributions. The plan
sponsor is simply the financial institution offering the ESP. As a subscriber,
you are entitled to contribute up to
$4,000 for each beneficiary each year
to an ESP – to a lifetime maximum of
$42,000 for each beneficiary.
Education Savings Plans offer three
very powerful advantages over regular
savings, which make them much more
effective solutions to the high cost of
post-secondary education.
Advantage 1:
Although the contributions you make
to an ESP as a subscriber are not tax
deductible, they compound in a taxsheltered environment, just like an
RSP. All investment returns, including
capital gains, interest and dividends,
accumulate tax-free, meaning that
they can grow far more quickly than
regular savings.
Advantage 2:
Once the ESP’s beneficiary enrolls in a
full-time qualifying post-secondary
program of studies (or part-time for
disabled beneficiairies), education
assistance payments consisting of the
plan’s accumulated earnings are paid
out to the beneficiary. These education assistance payments are deemed to
be income in the beneficiary’s hands
and taxed as such at his or her marginal rate. Your beneficiary’s tax bracket
will undoubtedly be a good deal lower
than yours, so this can represent a considerable tax saving.
7
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Advantage 3:
Thanks to the 1998 Federal Budget,
contributions to an ESP for a qualifying child will now attract a grant from
the federal government – called a
Canada Education Savings Grant.
That’s right, for every dollar that you
contribute to an ESP, the federal
government will contribute 20 cents
– to a maximum of $400 – for each
year that your child is age 17 or under
throughout the year. That’s an automatic 20 percent return – before you
even get started making your investment work for you!
The Business plan on Public Education Is A Large And Diverse System In The
Public education is a large and diverse system in the United States of America. An important division of this system EMS is responsible for development and implementation of various safety programs with the aim of saving many lives and minimizing the chances of medical and trauma emergencies. To plan an effective public education system for an area, the knowledge of the geography plays a critical ...
The Canada Education Savings Grant
Beginning January 1, 1998, any contributions made to an ESP for a child will
earn a Canada Education Savings Grant
(CESG) from the federal government,
up to and including the year the child
reaches age 17. The grant is equal to
20 percent of the contributions made
to the ESP, to a maximum of $400 each
year. In other words, the first $2,000 of
ESP contributions will attract a grant at
20 percent from the government. Don’t
expect a cheque in the mail though.
Grant payments will be made directly
to the ESP on a regular basis.
The CESG is a distant cousin to your
RSP in the way it works. Specifically,
each child age 17 or under in the year
is entitled to CESG contribution room
of $2,000 per year. If no contributions
are made to an ESP in a given year,
that contribution room is carried forward to any future year. Once you do
happen to make a contribution to the
ESP (and, under the general ESP rules,
the maximum contribution is $4,000
each year), the contribution room is
used up and a grant is provided at
20 percent of the contribution room
used. Any contributions over and
8
above the CESG contribution room
cannot be carried forward to attract
a CESG payment in a future year.
Consider Jamie’s story.
Jamie is four years old in 1999, and
his CESG contribution room for 1999 is
$2,000. In February 1999 Jamie’s father
made an ESP contribution of $1,200
for Jamie. A CESG payment of $240
(20% of $1,200) is paid directly to the
ESP. A few days later, Jamie’s grandmother made a $2,500 contribution
to another ESP on behalf of Jamie.
Since only $800 of Jamie’s CESG contribution room is available at the time
of Grandma’s contribution (his father
used up $1,200 of it), only $800 of her
contribution qualifies for a CESG payment, and Jamie’s grandmother’s contribution will attract a grant of $160
(20% of $800).
The remaining $1,700
of her contribution will not qualify
for a CESG payment this year – or in
the following year. By the way, if
no contributions other than Jamie’s
father’s were made, the remaining
$800 of Jamie’s CESG contribution
room would be carried forward for
use in a future year.
It is important to separate in your
mind the CESG rules and the ESP rules.
While the CESG rules allow any unused
CESG to be carried forward for use
in any future year, the ESP rules
impose a maximum annual contribution of $4,000 to an ESP. The result is
that the most you will receive in CESG
payments in any given year will be
$800 (20% of $4,000).
To ensure that
Canadians are making use of ESPs on a
regular basis, there’s another catch to
be aware of. If you’re hoping to put
money into an ESP for a child who is
age 16 or 17 in the year, you’re going
to receive CESG payments only where
one of two conditions are met: (1) a
minimum of $2,000 in ESP contributions must have been made on behalf
of the child before the year he or she
turns age 16, or, (2) a minimum of
$100 in annual ESP contributions must
have been made on behalf of that
child in any four years before the year
the child turns age 16. The message is
clear: Make an ESP a regular habit if
you want the benefits of the CESG.
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The Value
of Education
Savings Plans
and Canada
Education
Savings Grants
NOTES:
1. Assumes investment growth of 8%
per annum, compounded monthly.
2. Assumes monthly contributions
of $166.67 ($2,000 per year) for
18 years.
3. Assumes an average tax rate of
40%.
4. Canada Education Savings Grant
equals 20% of the contributions
made to the ESP, to a maximum of
$400 each year.
Page 9
Outside
ESP
Inside
ESP –
no CESG
Inside
ESP –
with CESG
$20,000
Capital invested
$40,000
Growth on capital
Types of Education Savings Plans
There are three general types of ESPs:
group plans, individual plans, and
family plans. Each offers a different
degree of flexibility.
Group Plans:
This type of ESP, often called a “scholarship trust”, is one in which your child
is just one of many – perhaps thousands
– of beneficiaries, most of whom are
not related to each other. While group
plans offer many of the same benefits
of other ESPs, they generally differ in
three key ways. First, you’ll typically
have no control over where the
money inside the ESP is invested.
Investments are made by the plan sponsor and generally include conservative
securities such as government bonds,
guaranteed investment certificates, treasury bills, and insured first mortgages.
Second, if your child decides not to pursue an education, you’ll receive your
capital contributions back, but the accumulated growth on that capital accrues
to all the remaining beneficiaries in
the plan. Finally, there may also be
restrictions on changing beneficiaries,
and resuming post-secondary studies
after they have been temporarily
interrupted.
Individual Plans:
An individual plan ESP can be set up
for a single beneficiary. This type of
plan offers more flexibility than a group
plan in that you will not be limited in
your investment choices. For example,
your Investment Advisor is able to
$60,000
Canada Education
Savings Grant (CESG)
$80,000
$100,000
Growth on CESG
assist you in setting up such an ESP
with any number of mutual fund companies. While you will be limited to
funds offered by the particular company
you choose, the choices are usually
broader than what a group plan offers.
Most importantly, the choice of mutual
funds within the fund family is yours.
An investment option that is even more
attractive is the self-directed individual
plan, which can be opened directly with
our firm. A self-directed plan allows
you to make virtually any investment
of your choice in the ESP. Talk about
flexibility!
Family Plans:
A family plan ESP is simply a plan under
which you may designate a number of
different beneficiaries, with the caveat
that each beneficiary must be related
to the subscriber by blood or adoption.
A family plan offers the same investment flexibility as an individual plan.
That is, you will be able to choose from
any variety of investments, depending
on whether your family plan ESP is
administered by a mutual fund company,
another financial institution, or is a
self-directed ESP of the type we offer.
A benefit offered by a family plan that
is not available from any other plan is
the ability to allocate the ESP’s investment earnings to the beneficiaries in
any proportion you want. If, for example, three children are named beneficiaries and only one pursues post-secondary education, all the investment
returns in the ESP can be allocated
and paid to that one student. This
is not possible under a group or
individual plan.
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Education Savings Plans:
You Were Asking?
Q
A
Who can be a beneficiary?
A distinction must be made
between individual plans and multiplebeneficiary plans – often referred to as
family plans. Individual plans let you
choose anyone as beneficiary – even
yourself, your spouse, or a non-related
person. Under a family plan, each
beneficiary must be related to the
subscriber by blood or adoption. This
generally includes your children and
grandchildren, or brothers and sisters.
The blood relation does not include
nieces or nephews (although an individual plan may be set up for a niece,
nephew, or any other beneficiary for
that matter).
Also note that in terms
of beneficiary eligibility for a family
plan, you do not have a blood link with
yourself or your spouse. New family
plans require that all beneficiaries
named when the plan is opened be
age 20 or younger at that moment.
Where additional beneficiaries are
added at a later date, they must be age
20 or younger on the date they are
added as beneficiaries. Finally, contributions are prohibited for beneficiaries
under a new family ESP once age 21
is reached.
Q
A
As a subscriber, how much can I
contribute?
The maximum annual contribution per
beneficiary is $4,000. For example, if
you name your three children as beneficiaries in a family plan, you could
contribute a maximum of $12,000 a
year to that one ESP. Total contributions over the life of the plan are
capped at $42,000 per beneficiary.
Q
A
Which schools qualify?
Any post-secondary educational
institution (college, university or CEGEP)
in Canada or abroad qualifies, as do
many trade and technical schools. Beneficiaries must be enrolled in a full-time
study program to qualify for an education assistance payment from an ESP
(or part-time for disabled beneficiaries).
For ESPs set up prior to 1999, the education program must generally run at
least three consecutive weeks (13 weeks
for schools outside of Canada) with at
least ten hours of courses per week.
For new ESPs registered in 1999 or
later, the education program must
generally run for at least three months,
unless the program is at least three
10
weeks long and one of these two conditions are met: (1) educational assistance payments do not exceed $5,000,
or (2) the payment is approved by the
Department of Human Resources
Development. Enrollment in certain
correspondence courses also qualifies
a beneficiary to receive education
assistance payments from an ESP.
Q
A
How are education assistance
payments made to my ESP’s
beneficiary?
In order for an education assistance
payment to be made, you must provide
proof of the beneficiary’s enrollment
in an eligible program of studies when
the payment is requested. As the plan’s
subscriber, you retain complete control
over the timing and amounts of these
payments. However, it should be
noted that education assistance payments made in the first three months
of schooling cannot exceed $5,000.
Investment returns earned in an ESP
lose their character when paid out,
which means that there is no preferential tax treatment for dividends and
capital gains. All amounts paid out as
education assistance payments will be
taxed as income at the beneficiary’s
marginal rate.
Q
A
If I have several beneficiaries,
does the income have to be split
equally among them?
With a family plan, the income can
be allocated to eligible beneficiaries
in any manner. If one of the named
beneficiaries does not pursue postsecondary education, all of the income
can be paid out to those beneficiaries
who do.
Q
A
Can I replace one of the beneficiaries designated when the ESP
was opened with someone else
at a later date?
Generally speaking, yes. However, you
would have to check the terms and
conditions of your particular ESP to
ensure that the plan’s trust agreement
allows this, and under what conditions.
For instance, our ESPs accommodate a
change of beneficiaries at any time.
Virtually anyone can be designated as
a replacement under an individual plan
ESP. For a family plan, the replacement
beneficiary must be related to the subscriber by blood or adoption. To avoid
possible penalties, the replacement
beneficiary for a family plan must be
20 years of age or younger when
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designated, and he or she must be a
brother or sister of the beneficiary
being replaced.
Q
A
What happens to the capital that
I contribute to the plan?
The capital you contribute to the plan
will be returned to you at any time
upon request, with no adverse tax
consequences. However, should you
request a reimbursement of capital
before winding down the ESP, this
capital may not be put back into the
plan other than as a regular contribution subject to the annual and lifetime
contribution limits of $4,000 and
$42,000 per beneficiary, respectively.
Q
A
What kind of expenses can education assistance payments from
an ESP be used for?
Educational assistance payments from
an ESP to its beneficiary are intended
to be used for tuition, books, room
and board, transportation and any
other expenses incurred during a
course of full-time post-secondary
studies. The beneficiary must declare
the amounts received as income, but
at this time, no accounting of how
such amounts are spent is required.
Q
A
How long can an ESP “last”?
Q
A
Can the same person be
named beneficiary of more than
one ESP?
ESPs have terms up to 25 years
but you may not contribute past the
21st year following the year in which
the plan is opened.
The same beneficiary can be named in
more than one plan. However, there is
ususally no advantage in doing so,
since the total amount contributed for
a given beneficiary to all plans for
which he or she is named beneficiary
cannot exceed the annual limit of
$4,000, or $42,000 in a lifetime.
Q
A
What happens if my beneficiary
doesn’t undertake postsecondary studies?
Your first option is to simply replace
your beneficiary with another who
is more interested in the benefits of
a post-secondary education. With a
family plan, naming two or more
children related to you by blood or
adoption as beneficiaries at the outset
will allow the earnings of the ESP to be
used by any beneficiary who happens
to choose post-secondary education.
Where the ESP has been in existence
for at least 10 years, and all designated beneficiaries have reached the
age of 21 and are not pursuing postsecondary education, as a subscriber
you may elect to pay yourself any
unused assets remaining in the plan –
and not just your original capital contributions, but the accumulated earnings as well. In this event, you should
note that there will be a significant
tax liability when you withdraw earnings accumulated in the ESP. Your original capital contributions are withdrawn tax-free, but any accumulated
earnings withdrawn are taxed once as
income at your current marginal rate,
and then subjected to an additional
20 percent penalty tax. The Minister
may waive the 10-year and 21-year
time requirements if the request for
the accumulated income payment is
made because a beneficiary’s impairment will prevent attendance at a
post-secondary educational institution.
There is one practical option available
to avoid paying tax and the 20 percent
penalty on the accumulated earnings
when you make withdrawals as a subscriber. A lifetime maximum of $50,000
of such accumulated earnings payments may be transferred to your RSP
or into a spousal RSP provided that
you have enough RSP contribution
room to cover the amount. You’ll
avoid income tax and the penalty on
amounts transferred to your RSP this
way. Anything in excess of the amount
transferred to the RSP will be subject
to income tax plus the 20 percent
penalty.
Note that where an accumulated earnings payment is withdrawn from an
ESP by its subscriber, the plan must be
terminated by February 28 of the following year.
Finally, if you feel philanthropically
inclined, you can always donate the
accumulated investment earnings to
the post-secondary educational institution of your choice. Unfortunately,
since these are pre-tax earnings, such
a donation will not give rise to a tax
credit, although you will avoid paying
tax or penalties on those earnings.
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Q
A
When and how will Canada
Education Savings Grants
be paid?
All CESG payments will be made
directly to the ESP, on a quarterly
basis. At the end of each quarter,
financial institutions will report details
of all contributions received during
the quarter to the government, which
remits the grants in the following
month. Note that for a contribution to
attract a CESG, the beneficiary must
be a Canadian resident and, before
receiving the grant, have a valid social
insurance number.
Q
A
What happens to the CESG payments if a beneficiary does not
pursue post-secondary education?
The original principal portion of the
CESG payments must be repaid to the
government if a beneficiary does not
attend a full-time qualifying educational
program. The accumulated earnings on
the grant need not be repaid.
Q
A
Are there other situations where
the CESG must be repaid?
The principal portion of the CESG payments received by the ESP must be
repaid in the following situations:
(1) when original capital contributions
are withdrawn from the ESP for noneducational purposes, (2) when the
ESP is terminated or revoked, (3) when
a payment of ESP income is made for
non-educational purposes, (4) when a
beneficiary under the plan is replaced
(except where the new beneficiary is
20 years of age or younger and either
the new beneficiary is a brother or sister of the former beneficiary or both
beneficiaries are related to the subscriber by blood or adoption), and
(5) when there is a transfer from the
ESP to another ESP involving either a
change of beneficiaries or only a partial
transfer of funds.
Q
A
Can I somehow obtain CESG
payments using pre-1998 ESP
contributions?
No. You’ve got to be careful here. The
government has set up the CESG rules
so that you will not be able to convert
unassisted contributions (contributions
12
for which no CESG payments were
offered) into contributions for which
CESG payments are given. For example,
if you were to make a tax-free withdrawal of your pre-1998 capital contributions made to an ESP, you would
not be able to use that money to then
re-contribute to an ESP to obtain a
grant. Specifically, any withdrawals
after February 23, 1998 of unassisted
contributions for non-educational purposes, or transfers from one ESP to
another, will result in restrictions on
future CESG payments. In fact, any
contributions made to an ESP in the
year of such a withdrawal, or in the
following two years, in respect of all
of the plan’s beneficiaries, will not be
eligible for the CESG. In addition, the
beneficiaries will not be entitled to
new CESG contribution room for those
two following years. These restrictions
won’t apply where the withdrawals of
unassisted contributions are less than
$200 in the year, or where there is a
full transfer of assets held in an ESP
from one plan to another ESP and
there is no change in beneficiaries.
Q
A
Does the CESG payment reduce
the amount I could otherwise
contribute to an ESP?
No. The $4,000 annual and $42,000
lifetime ESP contribution limits are
not affected by the CESG payments
received. That is, the CESG payments
may be provided over and above these
maximum ESP contributions.
Q
A
Is there a lifetime limit on CESG
payments that may be received?
Sure there is. The most any beneficiary
can receive in CESG payments is $400
for each year that the beneficiary is
age 17 or under. This translates into
a lifetime maximum of $7,200 ($400
times 18 years) per beneficiary. Similarly,
the maximum CESG payments a beneficiary may withdraw from an ESP as part
of his or her educational assistance payments is $7,200. This ensures that no
single beneficiary, particularly under
a family plan where ESP assets can be
allocated from one beneficiary to the
next, will receive more than his or her
fair share from the government.
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Page 13
Tips for Education Savings Plans
Tip 1: Start an ESP as early in the child’s life as possible to maximize the taxsheltered compounding and the CESG payments available.
Tip 2: If there is a spread of six years or more between the oldest and
youngest beneficiaries, set up a separate ESP plan for the these beneficiaries. The reason is simple. An ESP must be wound-up after it has
existed for 25 years. You don’t want to run into a situation where the
plan must be wound-up before the youngest beneficiary has finished
his/her post-secondary education.
Tip 3: Consider holding foreign securities in your ESP to maximize investment returns. Although the types of investments that you may hold in
an ESP are restricted to the same investments eligible for your RSP,
there are no foreign content restrictions on an ESP, compared to the
20% limit with an RSP.
Tip 4: Contribute at least $4,000 every two years to an ESP to maximize
receipt of the CESG payments available. If, for example, you allow the
CESG contribution room to build up over three years ($6,000 of CESG
room at $2,000 of room for three years) you will not be able to use up
all that room. The reason is that, under general ESP rules, you are not
entitled to contribute more than $4,000 in a year. The strategy, then,
is to ensure that the CESG room available does not exceed $4,000 in
any year. This can be accomplished by contributing at least $4,000
every two years to an ESP.
Tip 5: Ensure that every ESP is in existence for at least ten years. This will
provide you with the option of transferring ESP earnings to an RSP
later if you have the RSP contribution room and you want to make
this transfer because a child does not follow post-secondary studies.
The 10-year requirement may be waived when a beneficiary has an
impairment.
Tip 6: If you are a grandparent looking to set up an ESP, consider giving the
cash to your own adult child, and then having your child subscribe to
the ESP for your grandchild instead. It is more likely that your own
child will have the ability to transfer those ESP earnings to an RSP later
if your grandchild chooses not to attend post-secondary school. This is
the case since you may be over age 69 – and without an RSP – by the
time your grandchild decides not to attend school. Keep in mind, however, that the capital contributed to the ESP in this case is returned to
your child – and not you – if your grandchild does not attend school.
You have given up all rights to the capital. This strategy may also help
to reduce probate fees in provinces where these fees apply.
Education Savings Plans:
Multiple Choice
Your Investment Advisor offers three
ESPs to suit your needs:
• Our Fully Guaranteed Investment ESP;
• Our Portfolio ESP;
• A variety of mutual fund ESPs.
Our Fully Guaranteed Investment ESP
No risk, no fees! Just like our Fully
Guaranteed Investment RSP, the Fully
Guaranteed Investment ESP allows you
to choose from investments issued by,
or directly guaranteed by, Canada’s
federal or provincial governments,
which you hold to maturity.
The range of eligible investments
includes savings bonds, treasury bills,
bonds, stripped coupons and retirement savings bonds. These securities
typically provide a higher return than
GICs and term deposits of equal term,
and carry an unlimited guarantee
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Page 14
when held to maturity. Conventional
deposits such as GICs and term deposits
are usually available with terms of five
years or less, whereas with the government-guaranteed securities described
above you can choose from terms of
30 days to 30 years. This flexibility in
choice of maturities is particularly useful when considering long-range projects such as saving for a child’s postsecondary education.
Opening a Fully Guaranteed Investment ESP costs nothing, and you pay
no ongoing administration fees or
transaction fees. Your part of the bargain is simply agreeing to restrict your
choice to the list of eligible investments, and to hold these investments
until they mature. Note that a $25
administrative charge is levied for
adding or substituting beneficiaries.
$50 is charged for a partial transfer,
and $100 for a complete transfer of
your ESP to another financial institution.
You may also include GICs and term
deposits in your Fully Guaranteed
Investment ESP on the occasions they
prove attractive. However, choosing
this option means accepting a lesser
guarantee. Term deposits and GICs are
protected only up to $60,000 (capital
and interest) by the Canada Deposit
Insurance Corporation or the Quebec
Deposit Insurance Board, institutions
which in turn are indirectly backed by
the government. Securities issued by
the government benefit from an unlimited guarantee when held to maturity.
your objectives, time horizon and risk
tolerance. The makeup of your Portfolio
ESP is then carefully monitored and
adjusted where appropriate, to capitalize on market trends and new investment opportunities as they arise.
Since the real benefits of our Portfolio
ESP can only be enjoyed when your plan
is large enough to enjoy the flexibility
that this product offers, we recommend that you consider it when you
have accumulated at least $10,000 in
ESP capital, or expect to reach that
level in the near future. You maximize
the tax advantage of your Portfolio
ESP when you concentrate on investments generating interest or dividend
income. However, growth-oriented
securities such as common stocks and
equity mutual funds can be added at
your option to improve your returns
and benefit from the reduction in
volatility that exposure to all asset
classes provides over the long term.
The annual administration fee for our
Portfolio ESP is $50. Note that this fee
should be offset by tax savings as early
as the first year of operation, even for
an individual (single-beneficiary) plan.
Your tax savings increase with each
additional year, making the flexibility
of our Portfolio ESP all the more affordable. A $25 administrative charge is
levied for adding or substituting beneficiaries. $50 is charged for a partial
transfer, and $100 for a complete
transfer of your ESP to another financial institution. Normal commissions
apply on securities transactions.
Our Portfolio ESP
Our Portfolio ESP is a self-directed plan
that gives you the widest range of
vehicles in which to invest your contributions: bonds, stripped coupons, treasury bills, stocks, mutual funds… the list
is virtually endless. This type of plan
allows you to take a truly diversified
approach to managing your ESP investments. With the help of your Investment
Advisor, you can put together a portfolio of securities perfectly suited to
14
Mutual Fund ESPs
A number of the major Canadian fund
companies offer ESPs that allow you to
invest in their underlying mutual funds.
On the plus side, mutual fund ESPs are
usually inexpensive, with annual administration fees in the $0 to $25 range,
and funds are an excellent way of
putting together a well-diversified
portfolio even if your means are modest. However, in the specific context
of ESPs, the fact that your investment
choices are limited to mutual funds
is something to consider carefully.
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Option 2:
“In Trust”
Accounts
Page 15
Option 2
Before deciding to hop on the ESP bandwagon, it will be worth
your while to understand a thing or two about the ESP’s main
competition – the “in trust” account. An “in trust” account is
simply an investment account opened for the purpose of setting
aside money for a child’s future – often to pay for a child’s education. In order to
compete with the ESP, the “in trust” account must also offer a tax-efficient method
of investing for the future.
“In Trust” Accounts:
The Tax Advantages
We mentioned earlier that attribution
rules apply to all dividend and interest
income earned on amounts that you
have given to a minor child, lent for no
consideration or lent at a rate below
Revenue Canada’s prescribed rate.
However, these attribution rules do
not apply to capital gains earned on
money that you have given to your
child or grandchild. This opens the
door to one of the few remaining
possibilities for income splitting – an
“in trust” account.
In essence, the idea is to give money
to your child or grandchild, who then
invests it in vehicles that generate
mainly capital gains. Any simple interest or dividend income will be taxed
back to you. However, the capital
gains will be taxable in the child’s or
grandchild’s hands. The investments
are intended to grow over time and
could be used by the child for education purposes when that time comes.
Generally speaking, your child will be
in a very low tax bracket, and if this is
the child’s only source of income, he
or she can earn up to $9,200 in capital
gains each year without having to pay
any taxes. Had this $9,200 of capital
gains been taxed in your hands, the
bill could have been as high as $3,600.
Obviously, an annual tax saving of
$3,600 compounded over the years
will represent a considerable sum by
the time your child has reached the
age of 18. Also, while simple interest
and dividend income is subject to
attribution, amounts earned by reinvesting that income are not. So if your
child does reinvest simple interest or
dividend payments received on which
you are required to pay the tax, any
compound interest or dividends earned
can be taxed in the child’s hands with
the same tax savings described above.
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Setting Up an “In Trust” Account
One small problem remains – a minor
(i.e. someone younger than age 18 or
19, depending on the province) cannot
enter into a legally binding contract.
Since the purchase of investments such
as stocks, bonds and mutual funds
involves a contract with the vendor,
most financial institutions will not accept
a minor as a client. This is where the
notion of an “in trust” account comes
into play. By setting up an “in trust”
account, a parent or grandparent can
transfer cash to, and make investment
decisions on behalf of, a minor. The
minor is the beneficial “owner” of the
assets in the account, while the adult
retains the responsibility of making
the investment decisions. Note that
from the moment the cash is transferred into the “in trust” account, all
investment decisions must be made
for the benefit of the minor, and the
adult donor gives up all rights to the
assets. Once the age of majority is
reached, the child takes control of the
account, and from that point onward,
attribution no longer applies to any
dividend and interest income earned
by the assets in the account.
Setting up the account is fairly simple.
As a parent or grandparent, you sign
the forms and provide investment
instructions for the account after consulting with your Investment Advisor.
Typically, the registration of the account
identifies the adult and the child as
follows: “Name of Adult“ “In Trust”
for “Name of Child”. It is important to
ensure that a legal transfer of cash
or securities between the parent or
grandparent and the child has taken
place. Be sure to arm yourself with
proper documentation showing that
the cash or investments have been
transferred from the adult to the child
with no strings attached that would
allow the assets to be eventually returned to the donor. To avoid Revenue
Canada questioning the validity of the
transfer to your child, it is a must that
the trustee and the donor not be the
same person. For instance, a grandparent may be the donor and a parent
the trustee, or one spouse may donate
the cash to the trust with the other
spouse acting as trustee. Also, keep in
mind that when the “in trust” account
is funded by a gift of assets other than
cash, this will be considered a disposition of these assets by the donor at
fair market value on the date of transfer for tax purposes. Such a disposition
could result in a taxable capital gain.
16
What are the drawbacks of the “in
trust” account from the perspective of
financing your child’s post-secondary
education? First and foremost, CESG
payments are not available for“in trust”
accounts. Second, the simple interest
and dividend income earned in the
account will be taxable in the hands
of the donor, although this pitfall can
be avoided by investing in stocks and
equity mutual funds to generate primarily capital gains. Finally, remember
that all assets in the account belong to
the child. At age of majority, control
over the account reverts to the child,
leaving him or her free to use the assets
as desired. If you are not comfortable
with control over what may amount
to a significant sum reverting to your
child or grandchild at this age, you
might wish to consider the use of a
formal trust, described below.
Formal vs. Informal Trusts
What we have described above is an
informal trust, since the only evidence
of the trust relationship is the registration of the account, and any documentation relating to the transfer of cash
or other assets to the account. A formal
trust can be created by a legal document
known as a deed of trust. This document identifies the donor (called the
settlor), the trustee, the beneficiary
and the assets of the trust. A formal
trust can be used for situations where
you don’t want control over the assets
to revert to the beneficiary as soon as
he or she has reached age of majority.
The deed of trust can specify how the
trust’s assets are to be invested, how
long the trust is to continue, and how
and when the assets are to be distributed to the beneficiary. For instance,
the deed of trust could specify that
the trustee controls disbursements of
income to the beneficiary from age
18 to 25 for the purpose of paying for
post-secondary education, and that
control over the trust’s assets reverts
to the beneficiary once he or she
reaches age 26. Formal trusts can vary
in complexity, and typically require
legal expertise to ensure that the deed
of trust is properly drafted. Formal
trusts are appropriate when you wish
to delay the shift in control over the
assets to the beneficiary beyond the
age of majority, or when the amount
in the trust is substantial.
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“In Trust” Accounts:
You Were Asking?
Q
A
If I am the donor, can I also be
the trustee of the “in trust”
account?
The idea behind an “in trust” account
is to have the child pay the tax on any
capital gains earned in the account. If
you don’t accomplish this, then an “in
trust” account hasn’t served its purpose. To ensure that the child pays the
tax on any capital gains, the donor has
to, in the words of Revenue Canada,
“divest, deprive, or dispossess” him or
herself of title over the funds. If your
name, as the donor, remains on the
account with the child’s, then you’ll
run into problems. Revenue Canada
will attack you under subsection 75(2)
of the Income Tax Act, which applies if
your consent is required before assets in
the account are disposed of. And this
will certainly be the case if you remain
as trustee on the account.
Q
A
Is it necessary to file a tax return
for an “in trust” account?
Our tax law requires that every trust
file a tax and information return annually. An informal trust is, in fact, a trust
(albeit an “informal trust”), and would
therefore appear to be caught under
the requirement to file a tax and information return annually. Currently,
Revenue Canada is not enforcing this
requirement, presumably because the
tax dollars to be recovered are relatively small given the size of most “in
trust” accounts. Revenue Canada’s
leniency could change if “in trust”
accounts were to become significant
in size.
Q
A
Do I have to file a tax return for
my child who has earned capital
gains from an “in trust”
account?
Q
A
Can I transfer the assets of an “in
trust” account to a formal trust
later?
While there is nothing under our
income tax law that will prevent you
from transferring assets from one trust
to another, provincial trust law is an
issue. When you set up the informal
“in trust” account, you have what is
known as a “bare trust”. Under this
arrangement, the only authority of
the trustee is to invest the funds on
behalf of the child until the assets
revert to the child once age of majority is reached. In fact, beneficial ownership of the assets in the account has
passed to the child from the outset,
and the donor has no right to place
conditions on these assets after-thefact. By transferring the assets to a
formal trust, you are altering the trust
arrangement, which could be in violation of provincial trust law. Even if
you were to make the transfer, there
would be a deemed disposition at fair
market value of the assets in the “in
trust” account under our tax law. This
could result in a taxable capital gain.
Q
A
Can I transfer the assets of an
“in trust” account to an ESP?
No. When you set up the “in trust”
account, you set up a trust arrangement
that cannot be changed without the
concurrence of the child beneficiary –
and this concurrence would have to be
ratified once the child reaches age of
majority. If, for example, you were to
transfer your “in trust” account assets
to an ESP and the child did not pursue
post-secondary education, you would
be able to take back those assets from
the ESP. This would not have been permitted under the terms of the “in trust”
arrangement, so you would have effectively circumvented the initial trust
arrangement established when the
“in trust” account was set up. This is
not permitted.
Normally, an individual who is not
taxable is not required to file a tax
return. An exception, however, is when
capital gains have been realized. As a
result, you should file a tax return each
year that there are realized capital gains
to report in the hands of the child.
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Tips for “In Trust” Accounts
Tip 1: Be sure to focus on assets that will generate capital gains rather than
interest or dividends when investing in an “in trust” account. Choose
stocks or equity mutual funds that invest in stocks to accomplish this.
This way, you’ll minimize the interest or dividend income that will be
attributed back to you – the donor.
Tip 2: Always ensure that the donor to the “in trust” account is not the
same person as the trustee. The trustee is the person whose name is
on the account with the child. This way, you’ll likely avoid problems
with Revenue Canada later.
Tip 3: Always be sure to name the child beneficiary on the “in trust”
account. For example, “John Doe in trust for Jimmy Doe” would suffice. However, “John Doe in trust” would not. If you fail to list the
individual child, you could run into a problem under subsection 75(2)
of the Income Tax Act which will tax the donor on all income in the
account if the beneficiary can be named later.
Tip 4: Set up a formal trust rather than an “in trust” account if the amounts
in the account are expected to be significant down the road, or if it is
important to maintain control over the assets once the child has
reached the age of majority.
Tip 5: Use an “in trust” account if it will not be possible to save enough for
a child’s education through use of an ESP alone. This can often be the
case where you are starting to save for a child’s education at a late
stage.
Tip 6: A combination of an “in trust” account and an ESP may make sense
where you’re not sure which method is best in saving for a child’s education. In addition, if you choose to use both vehicles for investing,
and you are holding both interest-bearing and equity investments
when setting aside money for your child’s education, you should consider holding the interest-bearing investments inside the ESP where
they will grow tax sheltered, and the equities in the “in trust” account
where all capital gains will be taxed in the child’s hands.
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4
How Much Is Enough?
You already know that your child or grandchild’s education is going to cost a lot of
money. But how much, exactly? And how much should you be investing today for
the future to ensure the costs are covered?
Is this an eye-opener for you? You can
see that, the earlier you start, the
easier the investing becomes. So visit
your Investment Advisor today to start
a program of saving for that special
child in your life.
Investing to
Cover Expected
Education Costs
Monthly Investment Required
To Save Enough For All Education Costs
Based On Expected Rate of Return
8%
10%
12%
Age
Of Child
First Year
Of PostSecondary
Education
Expected
Education
Cost For
Four Years*
Under 1
2017
$ 127,700
$ 266
$ 213
$ 169
1
2016
120,300
279
226
182
2
2015
113,500
293
241
197
3
2014
107,100
310
258
214
4
2013
101,100
328
278
234
5
2012
95,600
350
301
257
6
2011
90,400
376
327
284
7
2010
85,600
407
358
315
8
2009
81,100
443
396
353
9
2008
76,900
488
442
399
10
2007
73,000
545
500
457
11
2006
69,300
618
573
530
12
2005
65,900
716
672
629
* SOURCES: Statistics Canada and Association of
Universities and Colleges of Canada. Assumes tuition
fee increases of 9.06% annually and increases in other
costs of 3% annually. Figures assume student lives away
from home. These figures assume that investments are
to cover 100% of education costs. To the extent the
student pays for some costs, the amount saved monthly
can be reduced proportionately.
19
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5
A Final Comparison
Still not sure which is best for you – the ESP or the “in trust” account? Here’s a report
card on them. Ask your Investment Advisor for a recommendation based on your
specific circumstances.
“In Trust” Accounts
$4,000 per beneficiary per year.
Lifetime maximum of $42,000 per
beneficiary.
No limit.
No restrictions under a self-directed
plan. Investment fund or savings
account plans generally offer one
type of savings vehicle or mutual
fund family. Group plans generally
offer no options.
Generally no restrictions, although
some have expressed concern due
to provincial trustee legislation.
These concerns will likely be put to
rest over time.
Government
assistance (CESG)
Canada Education Savings Grant is
available. The grant is 20 percent of
contributions made within the
child’s “grant room” – normally a
maximum grant of $400 annually.
None.
Control over assets
The subscriber controls the investments and decides when to pay
the investment earnings to the
beneficiary.
The trustee of the account controls
how the money is invested. The
assets, however, belong to the child
at all times. The assets must be held
for the child until age of majority is
reached, then the control reverts to
the child.
Use of assets
A beneficiary must use the earnings
for qualifying post-secondary education, otherwise earnings revert to
the subscriber. If earnings are returned
to subscriber, income tax plus a 20%
penalty will be due by the subscriber
on the accumulated growth inside
the plan, unless the earnings are
transferred to the subscriber’s RSP.
Child may use the assets for any
purpose once reaching age of
majority. Contributor may not use
the assets in any way since the
assets belong to the child.
Recovery of capital
Subscribers may receive a tax-free
return of original capital at any time.
Certain trustee or administration
fees may apply.
Contributor has no right to recover
assets in the account since they
belong to the child.
Taxation of
earnings
Assets grow tax-deferred over the
years. Student will pay tax on withdrawals of earnings when enrolled
in a qualifying educational program.
Simple interest and dividends taxed
in hands of contributor annually.
Capital gains and compound interest and dividends are taxed in the
hands of the child annually.
Tax filings
20
Education Savings Plan
Contribution limits
Investment options
Education
Savings Plans
vs. “In Trust”
Accounts
No annual filings required until
withdrawals of earnings are made
from the ESP, then the beneficiary
must file a return to declare the
withdrawals.
Must file a return for the child to
report any taxable capital gains.
Technically, a trust tax return
should be filed annually, although
Revenue Canada has not, to date,
been enforcing these filings for
“in trust” accounts.
2631 C NBF/A BROCH.COUV.
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MANAGING THE WORLD ’ S
MOST IMPORTANT INVESTMENTS :
YOURS !
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