Surprise bill makes RESP marketable

For years advisors have said they like the RESP but feel it lacks tax incentives. But combined with recent changes in the 2008 Federal Budget, the passing of an opposition bill in the House of Commons earlier this week makes the RESP a much more compelling savings vehicle.

The private members’ bill, initiated by Liberal MP Dan McTeague, would allow Canadians to contribute up to $5,000 a year to their children’s education and then deduct the amount from their income tax.

“It would be fabulous because every Canadian would be able to deduct up to $5,000 a year per child and get a complete tax write-off combined,” says Jamie Golombek, vice-president of taxation and estate planning at AIM Trimark Investments. “This is a major opportunity especially if it is on top of the grant program.”

The grant program Golombek is referring to is the Canada Education Savings Grant (CESG). Canadians who put more than $500 in their child’s RESP are eligible to receive a CESG of 20 cents for every extra dollar up to $2,500 of their contribution. In other words, they are eligible for a maximum $500 grant.

Early estimates suggest it would cost the federal government $900 million to fund the deduction, whereas the CESG program currently costs about $600 million, Golombek says. Since the government has already said it will do what it can to block these tax changes from going through it’s conceivable it might throw out the CESG.

“This grant now cost the government around $600 million so the question is, which is the better program?” Golombek says. “I’m not sure the government has had any time to study this, because this bill didn’t come from the government.”

In Golombek’s opinion, even without the CESG, the deduction will create a much more powerful saving tool, particularly for parents in higher income brackets.

“If you put in $5,000, if you’re in 40% tax bracket, you get back right away 40% or $2,000,” he says. “If we use the example of $2,500, you put in $2,500 at a 40% tax bracket you’re going to get back $1,000. If you instead are just getting a grant on that, you are only going to get a $500 grant.”

The deduction adds to recent changes in last month’s federal budget that increased the RESP and expanded its lifetime. So if everything gets passed into law, advisors have an easier time selling RESPs because their clients can get the deduction, but the investment would have a longer life span to grow before it must be terminated.

Under the old rules an RESP must be terminated on its 21st year or 25th year if the beneficiary qualifies for the disability tax credit. Under the 2008 budget these termination deadlines would be extended to 31 and 35 years, respectively.

This makes the RESP more appealing to students looking to pursue education later in life or to use it to fund expensive university graduate programs.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com