Beyond RESPs: Financial planning for children

Parents and grandparents always want the best for their kids. No matter how young your clients’ children may be, September is a good time to capitalize on all of the free back-to-school awareness and talk to your clients about education savings and related financial-planning opportunities.

Education planning can sometimes take a backseat to more profitable retirement-planning and sales opportunities, but top sales people say RESPs and other education savings plans are an invaluable part of their practice strategies: They are the lynchpin in their plans to build and develop a “cradle-to-grave” business serving more than one generation of clients.

The strategy includes the following: giving tax tips to new parents; getting families started early with RESPs; moving beyond RESPs and using insurance with clients who can afford additional savings; talking to grandparents about different options they have when putting money aside for their grandchildren, particularly when an RESP is not the most appropriate solution for savings; and, finally, providing cash-flow suggestions, strategies, tax tips and safeguards for parents who are sending their children off to post-secondary institutions for the first time.

Tax tips for new parents

Filing a tax return, even if there’s no income to report, is a well-known first step, but it still needs to be emphasized as one of the most essential pieces of advice advisors can give to new parents who are interested in getting the most out of tax-related bonuses and government grants for families.

The National Child Benefit Supplement, or baby bonus, is part of the Canada Child Tax Benefit. The tax-free monthly payments are made to eligible families — one- and two-child families earning less than $99,128 and three-child families earning less than $132,703 — to help with the cost of raising children under 18. To qualify, both parents must first file their taxes and file an application with proof of the child’s birth. Click here to download the CCTB application. (Site will open in a new window.)

To help with day care and related costs, the Universal Child Care Benefit is a new initiative introduced in the most recent budget announcement. The UCCB is not income tested, meaning most parents supporting children under the age of six qualify for the $100 payment that comes monthly for each child. The government began making payments this summer. Families should receive the benefit on or around the 20th of each month, starting in July 2006. Those already receiving assistance through the CCTB are not required to re-apply to receive the benefit. This benefit replaces the CCTB under-seven supplement, which was worth $20.75 each month.

Families entitled to the NCBS are also eligible for the Canada Learning Bond program, which gives $500 plus annual payments of $100 each year to children born after January 1, 2004. The CRA says the contributions do not necessarily have to be made to the RESP.

If parents do want to set up an RESP, however, they need to get started by applying for a social insurance number for their children, which can take several months. Jamie Golombek, vice-president, tax and estate planning, at AIM Trimark Investments, says the process requires parents to first apply for a record of live birth, and then a birth certificate, before they can apply for the child’s SIN card.

The RESP

RESP deposits are not tax deductible, but tax on the income and growth generated by the investments is deferred until it is withdrawn to fund a child’s post-secondary education costs. When the assets are withdrawn, the income earned by the investments is taxed using rates for the child’s income-tax bracket, rather than the higher rates being paid by their parents. As well, clients cannot deduct any interest paid on money borrowed to contribute to an RESP.

Free money, though, is what makes RESP savings so attractive — for contributions up to $2,000, the Canada Education Savings Grant program adds 20% to the child’s RESP. The government grant increases to 30% of the first $500 in contributions for families with qualifying net income greater than $35,000 but not exceeding $70,000, and increases again to 40% of the first $500 contributed if the family’s net income is less than $35,000.

The maximum CESG grant a family can collect for each child is $400 per year to a lifetime maximum of $7,200. The maximum families can contribute to an RESP each year is $4,000. It is also possible to make up missed contributions and collect the missed grants, but careful planning is needed to avoid over-contribution penalties. Golombek says cumulative grant room exists for each child from the year they’re born or 1998, whichever is later, but the maximum CESG they can receive in one year is limited to $800 since the maximum contribution for each child is limited to $4,000.

If the child ultimately does not go to school, parents may roll the RESP assets into an RESP for another child, although grants must be repaid if they exceed the limits for that child, or parents may repay the CESG grants and roll the accumulated growth into their own RRSP. Since the original contributions were made using after-tax dollars — and as such, contributions are not deductible — families may receive their original payments back tax free.

Tomorrow: Beyond RESPs: Insurance, sales strategies and tax planning

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com

(08/29/06)

Kate McCaffery