Parents, Children and Some Financial Planning Considerations

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Once the child is enrolled with a qualifying post-secondary institution the funds within the RESP can be withdrawn to cover education costs.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While the monies are invested within the plan, the growth is tax-deferred until withdrawn.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.

Disabilities and Special Needs

Planning early for the costs that come along with supporting a child’s success through various stages of childhood to adulthood is an important focus for families. Financial planning for a family with a child with a disability can be more complex because it is likely to include a variety of additional caregiving issues and considerations. There could be costs associated with therapies, home and vehicle modifications, medical treatments and more. It is important for parents to know about the various government support options designed to help implement care strategies for children with disabilities and special needs.

Government Support and Income Tax Benefits

The various levels of government have programs that can assist with the care of a person with disabilities. This can include financial relief for special and customized equipment and income tax benefits. Many programs get implemented by the approval of the Disability Tax Credit (DTC). To apply for the DTC submit the form T2201 (Disability Tax Credit Certificate) to Canada Revenue Agency (CRA). Here are some programs to consider:

Disability Tax Credit (DTC) – a non-refundable tax credit that helps people with disabilities, or their supporting family member, reduce the amount of income tax they may have to pay.

Canada Caregiver Credit (CCC) – a non-refundable tax credit designed to help individuals who are depended on to care for an eligible person who has an impairment in physical or mental functions.

Child Disability Benefit (CDB) – a tax-free monthly payment made to families who care for a child under the age of 18 with a severe and prolonged impairment in physical or mental functions. This payment is automatic if the parent is eligible for the Canada child benefit (CCB) and the child qualifies for the DTC.

Assistance for Children with Severe Disabilities (ACSD) – a financial assistance program through the Ontario government available for eligible parents or guardians caring for a child with severe disabilities to help cover extra costs such as travel to doctor, hospital and other appointments related to the child’s disability, specialty shoes and clothes, and parental respite relief.

Ontario Disability Support Program (ODSP) – The Ontario Disability Support Program (ODSP) is offered by the government of Ontario for a person with a disability and has various areas of support, including:

1. Employment support designed to help people with disabilities find a job.
2. Providing health benefits including prescription drugs and vision care.
3. Income support designed to provide financial support to pay for living expenses.

To qualify for income support the disabled individual must be an Ontario resident, be 18 years old or older and have a severe physical or mental impairment that is continuous and lasting a minimum of one year. The amount received will depend on your specific situation.

An individual can earn up to $1,000 monthly of net income without affecting ODSP payments with 75% of earnings above this impacting ODSP support. Some common forms of income include employment income, Canada Pension Plan (CPP), Old Age Security (OAS), Workplace Safety and Insurance Board (WSIB) and spousal support. Examples of exempt income are child support, RDSP payments, certain federal and provincial tax benefits. Gifts and voluntary payments received cannot exceed $10,000 within a 12-month period before affecting your ODSP amount. The prescribed asset limit for a benefit unit is $40,000 for a single recipient and $50,000 for a couple.

Important exemptions to be aware of are the home you own and live in, a primary vehicle, Registered Education Savings Plan (RESP), RDSP savings and trust funds derived from an inheritance or life insurance or an asset necessary for the health or welfare of a benefit unit.

Registered Disability Savings Program (RDSP)

Saving for the long-term is important for individuals with disabilities to assist with their financial security. If a person qualifies for the Disability Tax Credit (DTC) and is under the age of 18, parents can open a RDSP and become the holder of the account with the child being the beneficiary. The RDSP holder makes contributions into the plan with the Government of Canada adding to the RDSP in two ways:

1. The Canada Disability Savings Grants (CDSG) which are calculated based on the contributions made and the family’s net income up to the annual amount.
2. The Canada Disability Savings Bond (CDSB) for low-income Canadians with disabilities. No contribution needs to be made.

Unused grant and bond entitlements can be carried forward for up to 10 years. Withdrawals can be made as a one-time lump sum or it may come time to convert the RDSP into an annual income stream with contributions amounts not being taxable and CDSG, CDSB and investment income being taxable income to the beneficiary.

Read more in our previous article:

What is a Registered Disability Savings Plan (RDSP)

Henson Trusts

A big concern many families face is the uncertainty of the financial well-being and care that their child with special needs will face once the parents have passed on. Henson Trusts are a way for families to preserve the inheritance of a disabled child while still protecting government support and financial benefits that the disabled person has been qualified to receive, specifically in Ontario, the ODSP. A Henson Trust is a legal document drawn up by a lawyer which is implemented upon the passing of the parents. The inheritance assets pass to the Henson Trust which removes legal title of the funds from the child to the trust. The trustee manages the money with complete discretion to provide income and if required lump sum payments to the beneficiary. There is no maximum value that can be held in a Henson Trust and no limit to the amount that can be paid out. If the distributions remain within the assigned income limits for the specific programs, government support and benefits will remain unaffected for the individual.

It can be challenging and complex for families to plan for long-term financial success and support immediate needs of their child who has a disability and special needs. Community support groups, a financial advisor, legal and tax experts can help navigate areas of concern, set-up a plan and implement solutions.

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.