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Back-to-school special: Savings 101

Back-to-school special: Savings 101

While education may lead to an enriching career, it’s better to have already built up some riches so you can afford it! In this special issue of Actualis, we present two tools that can help you do that: one for your kids and one for yourself, if you are thinking of going back to school.

Can you feel the electricity in the air? There’s no doubt about it: back-to-school season is upon us.

This annual event affects a lot of people… and moves a lot of money. Statistics Canada puts public elementary and secondary school enrolment at just over five million students, and estimates that average overall household spending on education is $1,518. Post-secondary students are also faced with major expenses. Take a look:

The big kids go back to school
Source: Statistics Canada


The question is how to deal with these expenses without going too heavily into debt.

FOR YOUR CHILDREN OR GRANDCHILDREN: THE RESP

The registered education savings plan (RESP) is designed to help parents build tax-sheltered savings over many years to pay for their children’s postsecondary education. Funds from three separate sources can go into an RESP: your contributions (to a maximum of $50,000 per beneficiary), government grants (based on your contributions), and investment income (accrued on both the capital and grant amounts).

The grants provided are substantial: the Canada Education Savings Grant (CESG) alone can reach $7,200, and the Canada Learning Bond (CLB) can total $2,000. Some provinces also offer grants, notably Quebec with its Quebec Education Savings Incentive (QESI) amounting to as much as $3,600.

How does it work?

When your child enrols in a qualifying educational program, he or she can receive educational assistance payments (EAP) made up of the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB), amounts paid by a federal or provincial education savings program, and the investment income generated by the RESP. These EAPs are taxable, but if the student has a very low tax rate, the payments won’t likely result in a significant tax bill. As for the contributions, they can be repaid to the subscriber with no tax implications (and given to the child, of course, if desired).

What happens if your child never enrols in a qualifying program, or if there is still money in the plan after your child graduates? In such cases, the contributions can be repaid to the subscriber with no tax consequences. Any grants received can be transferred to another beneficiary; otherwise, they will have to be paid back to the government. As for the accrued investment income, under certain conditions it can be transferred, tax free, to your RRSP or to a designated educational institution. Otherwise, taxes and penalties will apply.

Lastly, note that various conditions apply based on the type of RESP: individual, family or group. For more information about RESPs, visit the Canada Revenue Agency website.

FOR YOURSELF: THE LLP

But perhaps you are thinking about going back to school yourself to further your career. Well, there’s a plan for that, too: your own registered retirement savings plan.

Surprised? Just as there’s a Home Buyer’s Plan to help you buy a house, there’s a similar tool for going back to school: the Lifelong Learning Plan (LLP). Basically, this plan allows you to get a 10-year, interest-free loan from yourself, drawn from the savings in your RRSP.

How does it work?

To be eligible, you need proof of enrolment in a program that lasts at least three consecutive months, offered by a designated educational institution. If you qualify, you can withdraw up to $10,000 a year from your RRSP, to a maximum of $20,000 over the duration of the program. Your spouse can also withdraw a maximum of $20,000 from his or her RRSP. Thus, a student could gain access to a maximum of $40,000. Be aware, however, that you have 10 years, at most, to repay the withdrawal – which is actually to your advantage: the more quickly you repay the loan, the less impact it will have on your retirement savings.

Don’t forget the TFSA!

Finally, while the LLP offers an attractive way of using the savings you have already built up, there is an additional tool that you can use to save up for your children’s education or your own: the tax-free savings account (TFSA). The TFSA lets you grow your investments on a tax-sheltered basis and make tax-free withdrawals whenever you wish. Starting in 2015, the contribution limit is $10,000 per year. So, after a few years of saving, your TFSA could provide another source of funds for your children’s education, or could pay you yourself the equivalent of a tax-free income while you go back to school.

In short, while they say that “education is wealth,” it would seem that the reverse is also true!