Ed­u­ca­tion sav­ings plans can get com­pli­cated. John Heinzl an­swers reader ques­tions

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - JOHN HEINZL OPIN­ION

In your col­umn last week on RESPs, you made no men­tion of group schol­ar­ship plans. Are they a good op­tion?

I would not go near them. Group reg­is­tered ed­u­ca­tion sav­ings plans, which pool your funds with those of con­trib­u­tors, are sold by com­mis­sioned sales rep­re­sen­ta­tives and charge hefty up­front fees. As a re­sult, par­ents lose a chunk of their money right out of the gate. What’s more, the rules on con­tri­bu­tions and with­drawals are com­plex and re­stric­tive, and there are stiff penal­ties for leav­ing the plan early. In ex­treme cases, par­ents have lost all of their RESP sav­ings. It’s no won­der group RESPs have sparked hun­dreds of con­sumer com­plaints and drawn scru­tiny from reg­u­la­tors.

What sort of RESP do you rec­om­mend?

If you want to keep things sim­ple, you can open an in­di­vid­ual or fam­ily RESP at your bank and in­vest the money in mu­tual funds. For those seek­ing greater flex­i­bil­ity and lower costs, con­sider open­ing an RESP with a dis­count bro­ker so you’ll be able to in­vest directly in stocks or ex­change­traded funds. An RESP is not for gam­bling, so stick with blue-chip, div­i­dend-pay­ing com­pa­nies or funds. Dialling back the risk level as your child gets closer to at­tend­ing post­sec­ondary school – by shift­ing funds from equities to guar­an­teed in­vest­ment cer­tifi­cates, for ex­am­ple – is also a pru­dent strat­egy. You don’t want to get hit by a mar­ket cor­rec­tion just as your son or daugh­ter heads off to col­lege or univer­sity.

If you find all of this con­fus­ing, you’re not alone. The rules gov­ern­ing RESPs are in­deed com­plex; Em­ploy­ment and So­cial De­vel­op­ment Canada, which ad­min­is­ters the pro­gram, even pro­vides on-site RESP train­ing to fi­nan­cial in­sti­tu­tions.

When you make an Ed­u­ca­tional As­sis­tance Pay­ment (EAP) with­drawal, what por­tion comes from grants and what por­tion comes from in­come and cap­i­tal gains that have ac­cu­mu­lated in the RESP?

First, a quick re­fresher. An RESP with­drawal can in­clude a re­turn of orig­i­nal con­tri­bu­tions (which is not tax­able), an EAP (which in­cludes both grants and in­vest­ment earn­ings and is tax­able in the hands of the stu­dent), or a com­bi­na­tion of the two. With an EAP specif­i­cally, the gov­ern­ment uses a for­mula to de­ter­mine the com­po­nents of the with­drawal. To take a sim­ple ex­am­ple, if an EAP of $5,000 is with­drawn from an RESP that has $7,000 of Canada Ed­u­ca­tion Sav­ings Grants and $13,000 of earn­ings, the with­drawal would rep­re­sent 25 per cent of the to­tal avail­able EAP amount of $20,000. The CESG bal­ance in the ac­count would there­fore be re­duced by 25 per cent (to $5,250) and the earn­ings bal­ance would also be re­duced by 25 per cent (to $9,750).

Things get more com­pli­cated when the RESP is a fam­ily plan with two or more ben­e­fi­cia­ries. For ex­am­ple, although CESGs can be shared among sib­lings, each ben­e­fi­ciary is sub­ject to a life­time CESG limit of $7,200. To avoid push­ing a ben­e­fi­ciary over the limit, the fi­nan­cial in­sti­tu­tion will stop pay­ing out from the CESG com­po­nent of the plan and will in­stead deduct the funds from the earn­ings por­tion, once the in­di­vid­ual’s CESG bal­ance reaches zero. (A CESG over­pay­ment could in­ad­ver­tently hap­pen, how­ever, if a fam­ily has RESPs at two or more fi­nan­cial in­sti­tu­tions and in­for­ma­tion about CESG with­drawals is not shared be­tween them.)

If you find all of this con­fus­ing, you’re not alone. The rules gov­ern­ing RESPs are in­deed com- plex; Em­ploy­ment and So­cial De­vel­op­ment Canada, which ad­min­is­ters the pro­gram, even pro­vides on-site RESP train­ing to fi­nan­cial in­sti­tu­tions. If you’re keen to learn more about RESPs, much of the in-depth ma­te­rial – in­clud­ing ex­am­ple cal­cu­la­tions and quizzes – is avail­able on the ESDC web­site at bit.ly/2xaJLXy. What about paid co-op terms? As a reader pointed out fol­low­ing last week’s col­umn, it’s im­por­tant to con­sider paid co-op pro­grams when plan­ning RESP with­drawals. Univer­sity co-ops pay an av­er­age of about $22 an hour (based on in­for­ma­tion from the Univer­sity of Water­loo), which means stu­dents in th­ese pro­grams can earn well into the five fig­ures over a four-month term. In such cases, it may be pru­dent to with­draw non-tax­able RESP con­tri­bu­tions dur­ing years with ex­ten­sive co-op terms and make tax­able EAP with­drawals dur­ing pe­ri­ods when the stu­dent will be pri­mar­ily in the class­room and earn­ing lit­tle or no money. This will smooth out the stu­dent’s in­come and re­duce the amount of tax payable.

E-mail your ques­tions to jheinzl@globe­and­mail.com.

I NVESTOR CLINIC

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