One of the great things about being a grandparent is being a part of shaping a happy and successful life for your grandkids. Love is shared with the little ones in many ways from small gifts to a flow of affectionate hugs and kisses. The other temptation is to shower your grandchildren with presents – toys, clothes and other material items – that all too often are relegated to the basement, where they may go to waste.
The long-ballooning price of education
Consider the long-ballooning price of education. The estimated cost of a four-year undergraduate degree starting in 2015 is expected to be $68,933 for students living away from home, according to Heritage Education Funds Inc., using figures from Statistics Canada and the Canadian Centre for Policy Alternatives.
If their projections hold, those costs would nearly double for students born in 2015. A 2014 study by Fidelity Investments in the United States found that 53% of grandparents save or plan to save for grandkids’ postsecondary costs. In other words, funding the education of a grandchild is a great way to make a positive, sensible and loving contribution to his or her long term development. Here are some options to consider:
Registered Education Savings Plans (RESPs)
RESPs, which have been around in their current form since 1998, are the most popular way for grandparents to save for their grandkid’s higher education. Money placed into these investment accounts can grow tax-free. Through the Canada Education Savings Grant, the federal government provides a 20-per-cent grant on RESP contributions of up to $2,500 a year. If you take this route, you’ll find that the monthly contribution grows dramatically over time.
Open a non-registered account
The benefits of opening a non-registered account specifically for the purpose of saving for your grandkid’s schooling is that it is easy to set up, simple to understand and offers flexibility. You can withdraw the funds for any reason at any time, and retain control of them after your grandchild reaches the age of majority. The downsides are the temptation to use these funds for something other than your grandchild’s education, as well as taxation on all the income and any capital gains.
Use a Tax-Free Savings Account (TFSA)
By putting money into a TFSA, the savings of a grandparent will grow tax-free and the money can be easily withdrawn in the future to help finance a child’s education.
Set up a trust
This is a legal agreement where money is transferred from one person to another according to specific terms. It is a good way to manage, control and protect funds because it gives a grandparent the peace of mind of knowing that the money will be used for its intended purpose. It is important to set up the trust properly with a written agreement that outlines terms and conditions. There are also tax consequences to consider, depending on how the trust is funded.
Pay out corporate dividends
If you are incorporated or have an incorporated family business, you could build up savings in your corporate account and pay them out in the form of a corporate dividend at a later date to pay for your grandchild’s education. Your grandchild would need to own shares of your company. The benefit of this is that the dividends will be taxed in the hands of your child, who will presumably have a low income. However, please note: “Anti-Income Sprinkling” Rules put in place by the Canadian government are set to change in 2018, eliminating this option.
While helping fund the education of your grandchildren is deeply fulfilling, understanding the legal and tax implications that come along with this gesture is key. Our team is here to provide you with all essential information and to help structure a contribution plan of the best fit for you and your grandchildren. We welcome any questions you may have and look forward to connecting soon!
The Wooding Group at CIBC Wood Gundy, 780-498-5047