Introduction

With rising tuition costs and the increasing need for higher education, education planning has become an important aspect for many families. Whether you are planning for your own education, or for your children or grand children, this article aims to guide you through the important aspects that you must know. In this article, we will explore various planning considerations, investment vehicles, investment strategies, different sources for education financing and tax implications. Let’s get started!

 

Important Planning Considerations

Start Early: The Power of Compounding Growth

One of the most effective strategies in financial planning is to start early. The power of compounding growth means that the earlier you start saving, the more your investments will grow over time. By starting early, you can take advantage of compound interest, where the interest earned on your investments also earns interest. This can significantly increase the amount of money available for your child’s education.

Setting Education Goals

Setting clear and achievable education goals is essential for effective planning. Here are some steps to help you set and achieve your education goals:

1. Assess Your Financial Situation: Understand your current financial status and how much you can realistically save.
2. Define Your Goals: Determine the type of education you want for your child and estimate the costs.
3. Create a Savings Plan: Develop a detailed savings plan that includes contributions to RESPs, TFSAs, and other investment vehicles.
4. Monitor and Adjust: Regularly review your progress and adjust your plan as needed to stay on track.

 

Choose the Right Investment Vehicles - Which accounts and investments will you use?

It is very important to choose the right investment vehicles depending on your goals, personal financial situation and overall family dynamics. Below are some common vehicles to consider:

 

Registered Education Savings Plans (RESPs)

RESPs are a popular choice for Canadian families. These accounts allow you to save for your child’s post-secondary education with the benefit of tax-deferred growth. The government also provides grants, such as the Canada Education Savings Grant (CESG), which matches 20% of your contributions up to a certain limit1. This can significantly boost your savings.

Tax Implications: Contributions to an RESP are not tax-deductible, but the investment growth is tax-deferred. The withdrawals of grants and growth in the accounts are considered taxable income for the beneficiary (student) who typically has a lower tax rate. Withdrawal of the capital deposited in the account is withdrawn tax-free.

 

Tax-Free Savings Accounts (TFSAs)

TFSAs offer flexibility and tax-free growth on your investments. While TFSAs are not specifically designed for education savings, they can be a valuable tool. You can withdraw funds at any time without penalty, making them a good option for unexpected education expenses.

Tax Implications: Contributions to a TFSA are not tax-deductible, but all withdrawals, including investment income and capital gains, are tax-free.

 

Insurance Options

Insurance can play a crucial role in financial planning for education. Whole life insurance policies, for example, can accumulate cash value over time, which can be borrowed against or withdrawn to pay for education expenses. Additionally, insurance can provide financial security in case of unforeseen events. The cost of insurance can be quite low if insurance is purchased on the life of the child in early age.

Tax Implications: The cash value growth in a whole life insurance policy is tax deferred. Withdrawals or loans against the policy may have tax implications depending on the amount and the policy terms.

 

Registered Retirement Savings Plans (RRSPs) and the Lifelong Learning Plan (LLP)

While RRSPs are primarily for retirement savings, the Lifelong Learning Plan (LLP) allows you to withdraw funds from your RRSP to finance education for yourself or your spouse. This can be a useful option if you need to return to school or if your spouse is pursuing further education.

Details of the LLP include:

• You can withdraw up to $20,000.
• You have up to 10 years to repay the amounts withdrawn under the LLP.
• Generally, you must repay 1/10th of the total amount withdrawn each year until the full amount is repaid.
• Start of Repayment: The repayment period begins the earlier of:
  1. The second year after your last LLP withdrawal, or
  2. The fifth year after your first LLP withdrawal.
• You must make your repayments to your RRSP, Pooled Registered Pension Plan (PRPP), or Specified Pension Plan (SPP). You can contribute to any of your RRSPs with any issuer, your PRPP, or your SPP.
• You can repay more than the required amount each year if you wish to repay the LLP balance faster.

 

Tax Implications: Withdrawals under the LLP are tax-free as long as they are repaid within the specified period. If you repay less than the required amount in any year, the shortfall will be included in your income for that year and taxed accordingly. 

 

Trusts

Setting up a trust can be an effective way to save for your child’s education. Trusts can provide control over how and when the funds are used, ensuring that the money is spent on education. They can also offer tax advantages, depending on the structure of the trust.

Tax Implications: Trust income may be taxed at the trust’s tax rate or attributed to the beneficiary, depending on the trust’s terms. Proper structuring can minimize tax liabilities.

 

Gifts from Grandparents or other family members

Grandparents can play a significant role in education planning. They can contribute to RESPs, set up trusts, or even purchase insurance policies for their grandchildren. This can provide additional financial support and help ensure that your child has the resources they need for their education.

Here some key points regarding the tax implications of such gifts:

1. No Gift Tax: Canada does not impose a gift tax. This means that grandparents can give money to their grandchildren without either party having to pay tax on the gift itself.
2. RESP Contributions: The RESP rules and tax contributions are the same for parents, grandparents or other guardians. A child can be the beneficiary of multiple RESP plans started by different family members, but the maximum contribution limit for the child remains $50,000 overall.
3. Non-Registered Investments: If the gifted money is invested in non-registered accounts, any income generated (such as interest or dividends) may be attributed back to the grandparent if the grandchild is a minor. However, capital gains are taxed in the hands of the child.
4. Trusts: Setting up a trust can be an effective way to manage and control the use of gifted funds. Trust income may be taxed at the trust’s tax rate or attributed to the beneficiary, depending on the trust’s terms. Proper structuring can minimize tax liabilities.
5. Direct Gifts: Direct gifts of money to grandchildren for education purposes do not have immediate tax implications. However, if the money is invested, the tax treatment of the investment income will depend on the type of account used.

 

Investment Strategies

Once you have defined your goals and chosen the right investment vehicle(s), it is now important to find the right investment strategy. Some important considerations for your investment strategies are:

Determine Your Time Frame - How long do you have to invest?

The time frame until your child starts college will influence your investment choices. If you have a longer time horizon (e.g., 10-15 years), you can afford to take on more risk for potentially higher returns. If your child is closer to college age, you might prefer more conservative investments to protect your savings from market volatility.

 

Assess Your Risk Tolerance - What is your comfort level with risk?

Your risk tolerance will determine the mix of assets in your portfolio. Generally, stocks are riskier but offer higher potential returns, while bonds and cash are more stable but offer lower returns.

 

Diversify Your Portfolio - Spread your investments across different asset classes.

Diversification helps reduce risk by spreading your investments across various asset classes, such as stocks, bonds, and cash. This way, if one investment performs poorly, others may perform well, balancing your overall portfolio.

 

Consider Age-Based Portfolios - Adjust your asset allocation as your child gets closer to college.

Age-based portfolios automatically adjust the asset allocation based on your child’s age or the time until college enrollment. These portfolios start with a higher allocation to stocks and gradually shift to more conservative investments as the child approaches college age.

 

Regularly Review and Adjust Your Portfolio - Monitor your investments and adjust as needed.

Regularly review your portfolio to ensure it aligns with your goals and risk tolerance. Adjust your investments as your child gets closer to college or if your financial situation changes.

 

Student Loans and Loan Forgiveness in Ontario

Student loans are a common way to finance education. In Ontario, the Ontario Student Assistance Program (OSAP) offers a mix of grants and loans to help cover education costs. There are also bank loans and lines of credit available for various educational programs.

Loan Forgiveness: Certain professions, such as doctors and nurses working in underserved areas, may qualify for loan forgiveness programs. In addition, there are some other interest elimination and repayment assistance programs. Visit NSLSC website for information.

Tax Implications: In Ontario, the interest paid on student loans can be claimed as a non-refundable tax credit, but it Must be an eligible loan received under the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Apprentice Loans Act, or similar provincial or territorial government laws. This includes both federal and provincial student loans. Below are some additional details:

• The interest payments you make on your eligible student loans can be claimed as a 15% federal tax credit. This means that if you paid $1,000 in interest, you could reduce your federal tax bill by $150.
• Carry Forward: If you don’t need the tax credit in the year you paid the interest, you can carry it forward and apply it to any of the next five years.
• Restrictions: You cannot claim interest paid on any other type of loan, such as a personal line of credit or a consolidated loan that includes your student loan. Additionally, only the student who received the loan can claim the interest paid.

 

Financial Aid, Grants Scholarships and Bursaries in Ontario

• Financial Aid as well as emergency loans can be provided by colleges and educational institutions. Start with the “Financial Aid Office” of the institution to learn what is available.
• Ontario offers various grants to support students, including the Ontario Learn and Stay Grant, which covers tuition, books, and other educational expenses for students in specific programs. You can learn more about Ontario Learn and Stay Grant here in this link.
• Scholarships and bursaries are also available through schools and private organizations. Find out about other scholarships and bursaries through:
  1. StudentAward$
  2. ScholarshipsCanada.com
  3. Graduate students: apply for the Ontario Graduate Scholarship or the Queen Elizabeth II Graduate Scholarship in Science and Technology at your school’s graduate office. You can get $5,000 per term, to a maximum of $15,000 for an academic year.

Tax Implications: Grants and scholarships are typically tax-free if used for tuition and related expenses.

 

Tax Efficiency

Now that we have covered all the basis around planning and funding for education, achieving tax efficiency along the way is a crucial cornerstone. Below are some important tax considerations:

Strategic RESP Withdrawals

Be strategic while withdrawing funds from your RESP. Withdraw more of the Education Assistance Payments (EAPs) when the beneficiary is earning no or little income. You can learn more about RESP Withdrawals in our previous article “RESP Withdrawals: Essential Rules and Limits for Your Child’s Education”.

 

Tuition Tax Credit

The Tuition Tax Credit is a non-refundable tax credit available to post-secondary students. This credit allows students to reduce their income tax by claiming eligible tuition fees paid to a qualifying educational institution.

Eligibility:

• Must be 16 years or older and enrolled in a post-secondary program.
• The institution must be a designated post-secondary institution in Canada or an equivalent institution outside Canada.
• Tuition fees must be at least $100 per institution.

Transfer and Carry Forward:

• If the student does not need the full credit in the current year, they can carry it forward to future years or transfer it to a spouse, parent, or grandparent, up to a maximum of $5,000.

 

Canada Training Credit (CTC)

The Canada Training Credit is a refundable tax credit available to help cover the cost of tuition and other fees for courses taken to upgrade skills.

Eligibility:

• Must be between 25 and 65 years old.
• Must have earned income of at least $10,000 and paid at least $100 in eligible tuition fees in the year.

 

Moving Expenses

If you or your child moves to attend a post-secondary institution full-time, you may be able to deduct moving expenses from your taxable income.

Eligibility:

• The new residence must be at least 40 kilometers closer to the educational institution.

 

Education and Textbook Amounts

While Ontario phased out its provincial education and textbook tax credits in 2017, students can still claim the federal education and textbook amounts if they have unused amounts from previous years.

 

Adult Basic Education Tuition Assistance

Parents who are pursuing adult basic education may be able to claim a deduction for tuition assistance received for primary or secondary level education or certain other forms of training.

 

Child Care Expense Deduction

If you incur childcare expenses to enable you to attend school or to enable you to work, you may be able to claim these expenses as a deduction on your tax return.

Eligibility:

• The expenses must be incurred to allow you to attend an educational institution or start a job full-time or part-time.

 

Conclusion

Proper education planning involves many important aspects, from choosing the right investment strategies to understanding tax implications and setting clear goals. Given the complexity and significance of these decisions, seeking professional advice from an accredited financial planner is crucial. Additionally, consulting with a tax professional can help you achieve overall tax efficiency and maximize your savings. If you have any questions or need personalized guidance, we at Pharus Wealth Advisory Group are here to assist you every step of the way.