Use tax refunds to invest in RESPs

Parents are often relieved when they receive their tax returns, especially since the CRA says average, family refunds across the country are approximately $1700.

While these funds are usually spent on mortgages, new home appliances, family trips or RRSPs, parents have another option. They can consider RESPs and invest in their children’s futures.

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If that average tax refund were instead invested in an RESP from the time babies were born up until their 18^th birthdays, each Canadian kid would have over $53,000 available for post-secondary education. This is based on a 5% rate of return, and includes the Canada Education Savings Grant.

The current tuition rate for a four-year undergraduate degree is approximately $23,000—without factoring in residence or meal costs—so that amount would cover tuition costs for more than two years at today’s rate.

“The number one thing Canadian families with young children should be doing is investing in their children’s RESPs even before investing in an RRSP,” says Sherry MacDonald, president and CEO of the Canadian Scholarship Trust Foundation.

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She adds, “An RESP provides tax-sheltered growth on savings, but can also trigger additional contributions through the form of various government grants. There’s no better way to create a lasting legacy for your child.”

More than half of Canadian families have yet to invest in an RESP. In fact, HRSDC says only 43% of Canadian children have accounts in their names.

RESPs can hold up to $50,000 for each child and there’s no annual contribution limit. The federal government will also add a 20% matching grant that adds up to $500 into RESPs each year.

With these funds, students can enroll in trade schools, colleges or universities. Then only pay income tax on the income earned in the plan, as well as on any government grant portions withdrawn.

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What’s more, some provinces offer extra incentives. Quebec residents are entitled to the Quebec Education Savings Incentive, meaning they can get up 20% more on the first $500 contributed each year from the government. They get 10% on the next $2,000.

Families in Saskatchewan may be entitled to an extra 10% from the government on top of their contributions, up to a maximum of $250, through the Saskatchewan Advantage Grant for Education Savings.

For the time being, Alberta families are still eligible for the Alberta Centennial Education Savings Grant. This provides families with an extra $500 when they first start an RESP. They then get $100 when their child turns 8, 11, and 14 years old.

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