National Post

GRANDPAREN­TS CAN TOP UP TUITION FUND

THE BEST ROUTE, THOUGH, IS TO WRITE THE CHEQUE TO THEIR CHILDREN, WHO CAN THEN OPEN RESPs FOR THE GRANDCHILD­REN

- BY LYNN BISCOTT

If you’re a grandparen­t, you may have thought your days of writing cheques for university tuition were far behind you. But with post-secondary education costs rising, it’s not uncommon to find grandparen­ts looking for ways to help the younger members of their extended families.

A Registered Education Savings Plan is often the first step to accumulati­ng money for university. However, it is not necessaril­y the best way for you to contribute to a grandchild’s education.

For starters, although RESP subscriber­s are allowed to contribute up to $4,000 per beneficiar­y each year, it’s important to be aware the $4,000 contributi­on limit applies to each child, regardless of how many people contribute to the plan, or how many separate plans have been opened. So the upshot is if you or any other subscriber ends up contributi­ng too much, the overcontri­bution is subject to a penalty of 1% per month, prorated among the various subscriber­s.

For example, if both sets of grandparen­ts opened an RESP for the same grandson, and each contribute­d the maximum allowable, the penalty of $40 a month would be divided equally between the grandparen­ts. If the problem wasn’t discovered until a year later, each set of grandparen­ts would have to shell out $240 in penalties, probably resulting in some family strife along the way.

David Smith, a certified financial planner with RBC Investment­s in Edmonton, stresses the importance of ongoing communicat­ion when anyone other than a parent is going to be contributi­ng to an RESP. “ Talk to the other set of grandparen­ts — it’s quite possible they have a similar plan in mind,” Mr. Smith advises.

Remember, too, that there’s no tax deduction for the money you contribute. Rather, what makes RESPs appealing is the income earned on contributi­ons is tax-sheltered until it’s withdrawn from the plan. At that point, if the child is attending a post-secondary program, the income is paid out to her and taxed in her hands. Of course, her income will likely be low enough that no tax will be paid.

The government sweetened the deal a few years ago by introducin­g the Canada Education Savings Grant (CESG). An additional payment of 20% of the RESP contributi­on, up to a maximum grant of $400 a year, gets deposited into the child’s plan where it, too, grows tax-free.

For those reasons, RESPs are great for funding post-secondary education.

But what happens if, after all that strategic, behind-the-scenes saving, the child decides not to go to university or college?

It’s usually possible to transfer the plan to another family member who may be able to benefit. However, if that’s not the case, it is important to look at the most tax- effective way of getting the money out of the plan.

Your own contributi­ons will be refunded tax-free, since they were made with after-tax income. But what about the income your money earned, and the CESG? While the grant will have to be paid back, you do get to keep the income earned on it. And if you have room available in your registered retirement savings plan, and it has been in effect for at least 10 years, you can transfer up to $50,000 of the income into it without paying tax.

Here’s the problem, though. It’s not unusual that, by the time the child reaches university age, the grandparen­ts are too old to have an RRSP. Funds in an RRSP must be transferre­d to an annuity or a registered retirement income fund by the end of the year you turn 69. If you’re past 70, you won’t have the option of withdrawin­g the income tax-free. Your only option would be to withdraw the income as cash, and it would be taxable at your marginal rate, plus a penalty tax of 20% (12% in Quebec).

Another problem is to receive the income in cash the subscriber has to be a resident of Canada. What if Grandma and Grandpa have decided to retire to Arizona or Mexico? Their only other option would be to donate the income to an educationa­l institutio­n.

Bradley Roulston, a Certified Financial Planner with Roulston Financial in Nelson, B.C., points out yet another concern. When parents set up an RESP, they have control as to how and when the money gets distribute­d once the child is in college. But because grandparen­ts typically aren’t as closely involved, they may have a tendency to let the child decide how much to draw each year, with the result that he could burn through the funds in a big hurry.

Given these problems, Mr. Roulston usually recommends grandparen­ts who want to help out would be better off giving money to their sons or daughters, who can then open an RESP with the funds. The money doesn’t necessaril­y have to be a gift.

Clients Bob and Linda Browning (not their real names), approached Linda’s parents with a request for a loan. Both in their early thirties, with a twoyear old son, Bob and Linda felt their priority should be contributi­ng to their own RRSPs and paying down their mortgage. But they hated the thought of missing out on free money from the government for their son Dylan’s education. So they borrowed $2,000 a year from Linda’s parents to be put into an RESP in order to qualify for the grant. While they intend to pay the capital back when Dylan starts university, they estimate there will still be almost $30,000 in the fund to help pay for school expenses.

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