Parents, Children and Some Financial Planning Considerations: Education & Savings

July 10, 2024

Being a parent comes with many responsibilities including helping their children gain the knowledge, skills and the life experiences that contribute to their personal growth, long-term happiness and success. Planning for their future is important and comes with some financial expenses. Start early with thinking about how to support their future and put a plan in place with the financial strategies to help make this possible.

Educational Savings

Many parents believe it is important for their children to complete post-secondary education and want to assist with the cost. The Government of Canada has developed the Registered Educational Savings Plan (RESP), an investment account with the specific purpose of saving money to cover the costs of post-secondary education. The subscriber of the RESP, such as a parent or grandparent makes the contributions to the RESP for the beneficiary (child).

Once the child is enrolled with a qualifying post-secondary institution the funds within the RESP can be withdrawn to cover education costs. The maximum RESP contribution limit is $50,000 per beneficiary. The government pays 20% on the first $2,500 contributed per beneficiary each year up to $500 annually until age 18, with a lifetime limit of $7,200. An additional incentive of up to $2,000 is available to help lower income families with children who are eligible and born in 2004 or later.

While the monies are invested within the plan, the growth is tax-deferred until withdrawn. Once the funds are removed to pay for the beneficiary’s post-secondary expenses, the grant and growth is taxed to the beneficiary and reportable on their income tax in the year received. The money within the RESP is being committed to be used to fund post-secondary expenses.

Read more in our previous articles:

Understanding RESPs

RESP Withdrawals

‘In’Trust’ Accounts

If parents and other family members wish to gift money to a minor child to be used for a variety of long-term goals such as buying a vehicle or for the down payment of a first home, some consider an ‘in trust’ account. These accounts come with a number of considerations.

‘In trust’ accounts are a three-party relationship:

• The settlor who establishes the trust and contributes the funds. This individual must have a clear intent to create the trust.
• The trustee who is responsible for managing the funds for the sole benefit of the beneficiary.
• The beneficiary who in this circumstance is the minor child who will be receiving the funds.

Once the settlor deposits the funds in the ‘in-trust’ account it is deemed to be gifted to the child and the beneficial ownership belongs to the beneficiary. The trustee has the legal ownership of the funds while held within the trust account. The settlor must ensure the money will never be required for their own personal use or to gift to another beneficiary as they can no longer take the money back.

Formal Trust

A formal trust is achieved by having a lawyer draft a legal document which clearly specifies how the money is to be administered and paid out to the beneficiary. There is an initial cost to drawing up the documents as well as ongoing cost.

Informal Trust

Some parents and other family members may opt to set up an ‘in-formal trust’ account to eliminate the need of enlisting a lawyer to draw up the legal documents. This can be completed through a financial institution, however, setting-up an ‘informal trust’ has its own set of considerations. There may not be a clear intent to set up the ‘in trust’ account and therefore all growth produced may be attributed back to the settlor. Without a legal document there is no clear direction how to invest the funds and when to transfer the assets to the beneficiary.

Taxation

Canada Revenue Agency (CRA) within the Income Tax Act has clear rules pertaining to earnings within a trust account when the beneficiary is a minor. Interest and dividend income earned on gifted money will be attributed back to the settlor and will be required to be reported on their income tax. Capital gains or capital losses are not attributed back to the settlor if the gifted funds are invested with intent of capital appreciation. There is the 21-year rule which states that every 21 years a trust is taxed as if it was disposed of and all capital property reacquired at fair market value, unless it is actually sold or transferred to the beneficiary before this time horizon has been reached.

If a minor beneficiary contributed to the’ in trust’ account from their own earned income or from gifts directly received, then the attribution rules do not apply. T3 trust returns are required to be filed annually to report the income earned within the trust account’.

There are many options for saving for a minor child for all purposes. Speak to your advisor and accredited tax specialist to understand all the features, benefits, and tax implications for all options. The most important factor is to start early and plan for your children’s overall success.

FirstOntario Credit Union in partnership with Aviso Wealth has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This should be considered as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds. The views expressed are those of the writer and not necessarily those of Aviso Wealth.