Help students save money

Consider this: Your clients are 27 years old and married. The wife wants to go back to school to get her MBA. She has not used her RESP room because her parents didn’t create one for her, and she attended her undergrad on a full scholarship. So she’s got questions:

• Should she contribute to an RESP in advance of taking her MBA?
• Can she income split with her working spouse while she’s in school?
• What tax credits can she use that will carry forward when she’s back at work?
• Can she transfer any of those credits to her spouse?

Here’s how to help.

RESP

The primary advantage of an RESP is the 20% government contribution from the Canada Education Savings Grant (CESG). The maximum CESG grant she would’ve received in a lifetime is $7,200. However, since she’s older than 17, she’s no longer eligible to receive it.

And if she thinks a RESP is great for tax purposes, she may be wrong. RESPs are taxed in the student’s hands, so if she plans to work while in school and manages to pull in a high income, this may not be the best idea. If she doesn’t work, then there would be no tax consequences unless she has other sources of income.

Also, if she doesn’t finish her MBA, the RESP can roll over to her RRSP. (If she were eligible for government grants and received some, she would have to pay them back.)

are you going back to school?

TFSA

A TFSA is a clear winner due to its simplicity and other benefits. Such benefits include:

• having less paperwork than RESPs, both to set up accounts and deregister monies;
• being tax-free; and
• allowing anyone to contribute, such as a higher-earning spouse or parents.

There are no limitations or tax hits when money is withdrawn. And if she doesn’t finish her MBA, her TFSA is still not subject to tax.

RRSP

The client may want to consider an RRSP through the Lifelong Learning Program. She can withdraw up to $20,000 from her RRSP to fund her education, but may use only $10,000 per year. She must also follow these regulations:

• She must own an RRSP.
• She must enroll on a full-time basis (if a student meets the disability conditions, enrollment can be part-time).
• She must live in Canada.
• She must enroll in a qualifying educational program at a designated educational institution (most MBAs would qualify).
• She must take advantage before the end of 2057, when she turns 71.

While funds withdrawn are interest-free, they must be repaid within 10 years. Repayments begin the fifth year after the client first withdrew funds. She’ll have to repay at least a tenth of the total amount withdrawn each year. Also, if she earns income while going to school, she wouldn’t receive tax advantages (except no withholding tax on money coming out).

Tax credits

There are also tax credits for students. If your client gets a Canadian government student loan, she could deduct the interest charges. And, she can claim full- and part-time education costs on her tax return. For instance, if she received a scholarship or bursary, it would be exempt from tax. Also, most tax credits can be transferred to her spouse, or carried over to another year.

Caroline Hanna, investment advisor, BA, CIM, National Bank Financial Wealth Management