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Home  ->  Financial Planning & Investing  ->  Registered Plans

  ->  Registered Education Savings Plans (RESPs) ->  Alternative methods of saving

Other Methods of Saving for Your Child's Education Besides RESPs

Pay Down Debt!

Who Should Definitely Open An RESP?

RRSPs and TFSAs

Non-Registered Investment Accounts

Informal Trust Account

New Trust Reporting Requirements for Informal Trust Accounts

Problems With RESPs

Tax Tips

Pay Down Debt!

One of the best ways to save for your child's education is to pay down debt on which the interest is not tax deductible!  Pay down debt with the highest interest rate first.  Use our loan calculators to see how much interest you can save by paying off your debt more quickly.

If you are debt-free when your child begins post-secondary education, and have saved some money, you will have much less difficulty funding that education.

Who Should Definitely Open An RESP?

Despite what we say here, low to modest-income families should open an RESP for their children, as they can receive up to $2,000 of Canada Learning Bond without making contributions.

RRSPs and TFSAs

Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) - Once your debt is paid off, make sure you have contributed the maximum to your RRSP, and to your spouse's RRSP.  If you are in the lowest tax bracket, choose TFSAs over RRSPs.  When you're in a higher tax bracket, you can always use the TFSA to make a contribution to an RRSP.  If you don't own a home, you may want to invest in a First Home Savings Account (FHSA) (before a TFSA), where you'll get a tax deduction for contributions, and eligible withdrawals to purchase a home are tax-free.

Non-Registered Investment Account

Once the RRSPs/TFSAs are at their limit, start saving in a non-registered investment account.  If you save money outside of an RRSP, it is better for tax purposes to have assets which produce capital gains or Canadian dividends instead of interest.  See Try to earn your investment income (outside of RRSPs) at the lowest tax rate possible, on our Personal Income Tax page.  You can use our Canadian Tax Calculator or Investment Income Tax Calculator to compare the taxes you would pay on different types of investment income.

Informal Trust Account

Another option is an informal Trust account for your child, at a financial institution or brokerage.  Any interest and dividends on the account are taxed in the hands of the contributor, but capital gains are taxed in the hands of the child (beneficiary).  Interest and dividends from re-invested earnings are taxed in the hands of the child.  If deposits are made with family allowance or child tax benefit payments received for the child, then all earnings from these deposits are taxed in the hands of the child.  The disadvantage of the trust account is that the funds automatically become the property of the child when the child reaches the age of majority, so the contributor has no control over how the funds are used.  With a non-registered account in your own name, this problem does not occur.

New Trust Reporting Requirements for Informal Trust Accounts and Other "Bare Trusts"

There are both benefits and pitfalls with informal trust accounts (bare trusts), as noted in the article In-Trust Accounts: The Good, The Bad, and The Ugly, by Sandra Abley and Mollie Clark. It's important to know that T3 trust returns must be filed for these informal trusts for the 2023 and subsequent tax years, unless they have been in existence for less than 3 months, or they hold less than $50,000 in assets throughout the year (this also depends on the assets in the trust). There are significant penalties for not filing.  This is discussed in the article Bare trusts: New reporting requirements you need to know from Grant Thornton.

See also: Enhanced trust reporting rules by Jamie Golombek and Debbie Pearl-Weinberg, Tax and Estate Planning, CIBC Private Wealth.

Two other very common "bare trusts" for which T3 trust returns will have to be filed for the first time under the new reporting requirements are:

bulletbank accounts or investment accounts which have been made joint accounts, but the added person on the account has no beneficial ownership of the assets
bulletparent on title of adult child's property for financing purposes only
bulletadult child on title of parent's property for estate planning and probate purposes only

Canada Revenue Agency (CRA) has published New trust reporting requirements for T3 returns filed for tax years ending after December 30, 2023. Note that this means tax years ending on December 31, 2023 are included in the new trust reporting requirements. The deadline for filing these returns is March 31st each year, March 30th in a leap year. With March 30, 2024 falling on a Saturday, the deadline for the 2023 tax year is April 2, 2024, the first business day after the deadline. A trust account number should be applied for long before this deadline.

For information on how to file the T3 trust return see the T3 Trust Guide on the CRA website.

Tax Lawyer Anna Malazhavaya of Advotax Law has created a Basic Guide on Bare Trusts for Canadian Taxpayers which helps to explain how to determine if a bare trust exists.

Video Tax News has a webinar available: Expanded T3 Reporting Rules: Changes and Traps. For tax & accounting practitioners: A brandable letter for distribution to your clients is included with the course, communicating trust reporting changes with a focus on bare trust arrangements.

Tax Tip: If you're not sure if you have to file the T3 return, either file it yourself anyway, or get professional legal advice!

Problems With RESPs

We have done extensive financial analysis related to investing in RESPs vs paying down your debt, investing in RRSPs, or investing via a non-registered account.  We did not include any fee calculation with the RESP, and we assumed there would be no taxes payable when the amounts withdrawn are used for education.  Even with this bias toward RESPs, they did not look attractive to us.  The problem with the RESP is that

bullet contributions are not tax-deductible
bulletmany are structured so that the subscriber cannot choose the investments, thus cannot get a very good rate of return (see historical returns on stock market and other investments).  However, many are now structured to hold almost any type of publicly traded investment.
bulletall contributions can be lost to fees if the RESP is discontinued
bulletall earnings may be forfeited if the RESP is discontinued
bulletyou cannot guarantee it will be used for education, and if it is not used for education
bulletthe Canada Education Savings Grant (CESG) is lost
bulletall earnings may have to be forfeited
bulletif conditions are satisfied so that the earnings can be repaid to the subscriber as Accumulated Income Payments (AIP), tax is paid at marginal tax rate plus 20% on the earnings repaid to the subscriber, unless the subscriber can transfer earnings to their RRSP, in which case it will only be taxed at the regular marginal rate when withdrawn.

The only way an RESP has a chance of doing better than paying off your non-tax-deductible debt first, investing in RRSPs, or investing via a non-registered account is if

bullet you could guarantee 100% that the CESG and earnings will be used for education
bullet the RESP can be used to purchase investments with a good rate of return, and
bullet your child can shelter all the Educational Assistance Payments (EAP) by using tax credits for education costs, so that no taxes are payable.

Many institutions now offer the ability to change the beneficiary of an RESP - we have not checked the details of this, so make sure you ask about it if you decide to invest in an RESP.

You cannot guarantee that your child will use the funds for educational purposes, so why take the chance?  Put your money where it can earn a better return (after paying off your non-tax-deductible debt), and then it can be used for any purpose.  However, if an RESP would help force you to save for your child's education when you wouldn't do anything otherwise, perhaps it is the option for you.

Tax Tips:

There are other ways to save for your child's education besides RESPs, but if you're not going to use those, then invest in an RESP!

If you are a low to modest-income family, open an RESP for your children, as you can receive up to $2,000 of Canada Learning Bond without making contributions.

Revised: February 15, 2024

 

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