Beyond RESPs: Insurance, sales strategies and tax planning

Once families have made the most of RESP contributions to collect government grants, they may be ready to look at insurance products or family trusts as another set of savings options to fund a child’s education.

Universal life or whole life permanent insurance policies are two vehicles to build up a cash value over time that can be extracted or borrowed against on favourable terms when the time comes to pay tuition. Heather Clarke, vice-president of Investors Group Insurance Service, says tax planners also like to use insurance policies, because earnings and growth in the product’s investment component are tax sheltered, and withdrawals, to a large extent, come out tax free, as insurance policies are governed by a separate set of rules in the Income Tax Act.

In addition to there being no over-contribution or over-funding penalties, the policy-owner can have more control over the assets while at the same time locking in insurability and low premiums for the beneficiary early on.

“If I were a business owner I would first examine the family trust avenue. You can’t take the money out of that for a child that’s under the age of 18 or it’ll end up being taxed at a high rate, but once they hit 18 they can take the money out and it’s taxed in their hands. That can be a very effective way or doing things but there are lots of costs associated with it,” says Clarke. “Once you have done your RESP and you’re looking for tax-effective ways to save, insurance might be the next simplest option, then the family trust.”

What makes insurance so attractive is that even if the children don’t use the policy for their education, premiums can be paid up, locking in their insurability so they have a decent life insurance policy with low or no premiums in place once they’re older. As well, the policies are good for contributors who might be too old to make an RRSP contribution if the child doesn’t go to school — grandparents, for example, will likely be too old to roll the accumulated gains into their RRSPs, and if so, the assets may face onerous taxation, possibly affecting OAS payments.

Clarke says insurance policies are also good in situations where parents or grandparents want to set up for a fund naming the child as beneficiary, but retain control and ownership of the policy, so the money can’t be touched in case of troubled relations with parents or ex-spouses.

Having these options to offer grandparents is perhaps the most important part of the cradle-to-grave strategy. “We have people with our organization who have become top-of-the-table producers, simply wrapped around a registered education savings mantra,” says Industrial Alliance senior vice president, Paul Grimes.

He says middle-market opportunities in the industry are huge but families are so busy that to call at dinnertime and suggest they need to review their insurance coverage will undoubtedly result in an outright refusal to entertain the issue. On the other hand, talking about education savings, and pointing out that RESPs generate a guaranteed bonus of 20% “from dollar one,” is an easy way to start building a relationship with the family.

“The best people to market these to are grandparents,” says Grimes. “They’re living longer. They’ve got tons of money. They bought that house in Scarborough for $32,000 and sold it for $632,000 tax free and they want it to go to the kids. Grandparents are the best target market in Canada for RESPs, and then you talk to them about estate conservation and capitalization. That’s where the rubber meets the road.”

On his list of simple sales tactics is the “lucky loonie” strategy. He suggests sending parents of newborn children a shiny new loonie in a coin-store wrapper with a letter of congratulations, presenting them with their child’s first dollar.

Accompanying the coin, he suggests a note along the following lines: “I’m pleased to present you with your first dollar on the way to your child’s education savings plan. I’ll be calling you in the next couple of days to arrange a meeting to talk about the high cost of education and what you can do as a new parent to help your child in the future.”

“This one works well in small communities where the welcome wagon is still one of the biggest things,” he says. “It works like a charm.”

Finally, for parents about to send their children off to post-secondary education for the first time, there are a number of suggestions you can make that will help with cash-flow issues down the road, and a number of good reasons to save receipts along the way for use later in the year when the time comes to file tax returns.

To help with unforeseen cash flow issues, Della Dwyer, senior mortgage broker at Invis, suggests clients consider putting a home-equity line of credit in place as a proactive measure. After paying the one-time appraisal and legal fees — about $300 — the line of credit can be drawn upon and repaid many times over without any need to re-qualify. She says interest rates, usually based on prime, are typically half a point higher than the best rates a mortgage broker can get.

“It’s better to do it in advance because it takes two to three weeks to set up,” she says. “If a student is needing to have cash in the next week, they’re telling their parents two or three weeks too late. They could be booted out of their dorm or whatever during that time.”

On the tax savings front, the Institute of Chartered Accountants of Ontario has a checklist of tax tips for students. Currently, the first $3,000 of scholarship income is tax exempt; and unclaimed tuition fee credits can be carried forward to reduce income taxes in the future when a student’s income will likely be higher.

Students have five years to claim a tax credit for student-loan interest, but education and tuition fee credits can be carried indefinitely; if the student is earning income, even if they are not expecting a refund, filing a tax return will generate RRSP contribution room.

Students who move to attend school may claim the costs associated with moving, but only against income earned while going to school or new employment income earned during the year the student leaves school. This deduction can also increase the tuition tax credits that can be transferred to a parent.

Monthly public transit passes and receipts are good for a non-refundable federal tax credit, while textbook receipts are good for a non-refundable textbook tax credit, calculated based on $65 for each month the student qualifies for the full-time education tax credit and $20 for each month the student qualifies for the part-time education tax credit. The unused textbook credits can also be transferred to a spouse, common-law partner, parent or grandparent or carried forward to a future year.

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

(08/30/06)

Kate McCaffery