20 responses

  1. Commander T
    November 16, 2007

    There is a third option for RESP’s. You are allowed to collapse up to 50,000 of the taxable portion into an RRSP (the non-taxable portion can be taken out without tax consequenses). The advantage to collapsing into an RRSP is no penalty tax is payable. Of course in order to transfer the money into an RRSP contribution room must be availiable.

    Avoiding the 20% penalty tax could make a significant difference to these calculations.

    Trent

    Reply

  2. FourPillars
    November 16, 2007

    CT – thanks for the great comment!

    Yes, you are correct that the 20% tax can be avoided this way – I really should have mentioned it in the post (I will add it). The issue with trying to evaluate this strategy however is that the money goes into an rrsp which will be taxed upon withdrawal at a future date. All the other figures I’ve given are cold hard cash, after tax, after penalty.

    Mike

    Reply

  3. Fecundity
    November 16, 2007

    Great summary. Very helpful!

    One other thing to consider. Pretty much any post-secondary education qualifies, including: apprenticeships, trade schools, CEGEP, colleges and universities. So, it doesn’t matter if your kid goes to university to become a lawyer, takes an apprenticeship to become a plumber, goes to trade school to become a mechanic or goes to commmunity college to become a pharmacy technician, the RESP can be used, though I suppose the different programs would use different percentages of the money.

    Great point about the possible benefit of opening the account later rather than earlier. I’ll definitely have to take that into consideration.

    Question about your methodology, and forgive me if I missed something you stated. I know you were basing it on an equity security. What rate of return were you estimating, and are the dollar figures given assuming the full 26 years of growth and contributions without withdrawing anything at say, 18 years in?

    Reply

  4. FourPillars
    November 16, 2007

    Hi Fecundity – good point about the flexibility of what qualifies as post-secondary education.

    different programs would use different percentages of the money.

    This isn’t really relevant – when you make withdrawals you just ask for the money, no receipts are necessary. It’s important to withdraw every penny even if some of it isn’t needed for education, otherwise you will get nailed with higher marginal tax and the penalty.

    As far as opening the account later – I wouldn’t put too much stock into this advice simply because the rules keep changing so the odds of this rule staying the same for 26 years are not that great – that said the 26 year rule might get shortened as well.

    Methodology – there is a link to the spreadsheet on in the post – although it’s probably not that easy to figure it out. I will add the assumptions into the post.

    The equity return is 0.5% per month which works out to just over 6% per year, it also gets a 2% dividend at the end of each year. The dollar figures were calculated at the 18 year mark which is when the student would normally be going to school.

    Reply

  5. Fecundity
    November 16, 2007

    Ah, excellent. Thanks.

    Huh. Your spreadsheet is clear and well done. I just missed it. Sorry about that. I’m choosing to blame the pregnancy.

    Reply

  6. meshwerk
    December 15, 2008

    Great series, perhaps you can do the comparison now with the new TFSA – Tax Free Savings Account as an update to this article.

    Reply

  7. Four Pillars
    December 15, 2008

    Thanks Meshwork – that’s a good idea. For a high income earner the TFSA would definitely be superior to the open account but probably not quite as good as the RESP.

    I’ll put it on my list!

    Reply

  8. DM
    January 19, 2009

    Very informative to somone like me who is a novice investor.
    Thank you. I will be opening one tomorrow at 2pm!

    Reply

  9. PTR
    January 29, 2009

    Good discussion – I have a question – if you are contributing to an RESP from a Trust, who pays interest on the initial contribution? The contributing trust wouldn’t as it is set up as a payable at year end which eliminates tax in the hands of the trust. If the beneficiary is either a minor, or a trust established for a minor (both cases under a RESP) I would assume that the minor, or the minor’s trust would have the liability for the tax on the initial contribution – correct?

    Reply

  10. Four Pillars
    January 29, 2009

    PTR – I don’t understand your scenario.

    What interest are you talking about? Tax on the initial contribution? Huh?

    Reply

  11. PTR
    January 31, 2009

    Sorry, that should have read “tax” not interest. Thanks.

    Reply

  12. Four Pillars
    February 1, 2009

    PTR – still not sure what you are talking about. Sorry.

    Reply

  13. PTR
    February 3, 2009

    OK, I’ll try to clarify. Have a situation where a family trust is contributing to an RESP for a minor (likely to a trust). Is the contribution taxable? If so, who is taxable – the contributing trust, or the minor?

    Reply

  14. Four Pillars
    February 3, 2009

    PTR – there are no tax implications to a contribution to an RESP.

    Are you referring to the withdrawal from the trust?

    Reply

  15. PTR
    February 3, 2009

    Yes, the tax on withdrawal from the trust.

    Reply

  16. Four Pillars
    February 3, 2009

    Ahhh – that makes sense now.

    From what I understand about informal trusts – any capital gains taxes have to be paid by the owner of the trust ie a parent who has an ‘in trust for’ account for their child.

    I’m not sure about a formal trust – maybe the trust itself pays the tax? You should really talk to a professional about this one – or the administrators of the trust.

    One thing I know for sure is that the fact the money is going to an RESP has nothing to do with the trust tax issues.

    Reply

  17. John D
    October 15, 2009

    Under scenario #4, have you assumed that the non-registered account would be in the child’s name? If so, the taxable portion capital gains would not be attributable to the parent during the child’s younger years (i.e. 0 to 18 years). Dividends would be taxed in the parent’s hands as they are attributable. Since the capital gains would be taxed in the child’s hands and they get the personal tax amount free each year, it would be safe to say that a strategy could easily be built to get tax-free capital gains. Would this not save an additional $7,470 on the non-RESP acct?

    John

    Reply

  18. Mike
    October 15, 2009

    Hi John – thanks for the comment.

    I did not make that assumption – I assumed the non-registered account would be in the parent’s name. The idea is to compare with the resp where the money is always owned by the parent until it is given to the student.

    Reply

  19. Vivian Astroff
    June 21, 2014

    “when you make withdrawals no receipts are necessary” So say the equity-based RESP has grown very large and the student’s post-high school training is relatively inexpensive, could the student use the funds to put a downpayment on a condo and buy a car, for example? (After all, they will still pay personal income tax on the withdrawals, so the gov’t gets its cut.) E.g.: $150,000 RESP withdrawn over three years of community college with $20,000 for school tuition and the balance for purchase of condo and car. This is an actual possibility for my son, by the way.
    Viv

    Reply

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