Between the high cost of post-secondary education and an ever-evolving job market, some parents wonder whether a college education is worth it.
The “Cons” can seem to pile up. Will paying for post secondary education create a sense of entitlement and financial dependency? Does it force career decisions too early? Will it shortchange your retirement funds? People aren’t saving what they need, if they’re working as a Superstore greeter in their 80’s. But, the “Pros” add up too. Paying for your kids higher education will allow them to avoid student debt, provide more job opportunities, and even offer you some tax benefits.
When you’re an entrepreneur, it’s especially important to plan and forecast for your financial future, as well as your children’s. It can be a challenge to keep all of the options open for them, no matter what happens along the way. So, what should you keep in mind?
How much you help your offspring with their educational pursuits depends on how many kids you have, whether your finances are solid, and what their career plans are. Paying for a two year veterinary technician diploma program and paying for four years of university and four years of veterinary medical school are quite different.
If your children are small and you have time to save, start with a registered savings plan.
Registered Education Savings Plan
A Registered Education Savings Plan (RESP) is an investment savings account sponsored by the government to encourage saving for post-secondary education. Each year, through the Canada Education Savings Grant (CESG), the federal government matches at least 20% of contributions, up to $2,500 per year. These matching contributions mean you’re essentially getting paid to save for your kids higher education. Over the life of the plan, the government kicks in a grant of up to $7,200. The contributions accumulate tax-free, and taxes aren’t due until the money is withdrawn to pay for education expenses. And as the withdrawn money is in the child’s hands, it adds to their income, while they also have a tuition credit to help reduce income tax on their return.
If you’ve opened an RESP for a child, then consider including it in your estate planning. On your death, the RESP does not pass to the beneficiaries named in the plan. Since the RESP belongs to you, the RESP is an asset of your estate on your death. You should include a specific clause in your will explaining your intentions for the RESP, particularly if you want to have the RESP maintained for your children or grandchildren, rather than distributed as part of your estate.
In Ontario, having more than one Will can allow you to minimize the estate administration tax by requiring probate only for those assets that can’t be transferred without probate. Otherwise, probate fees would have to be paid upon the value of the whole estate regardless of whether probate is required to transfer an asset. For corporation owners, having a primary Will and a secondary Will is great for income tax savings since a Will can elect to set up a trust, especially for minors.
Primary Will assets include non-registered investment and bank accounts, personal property (car), and registered plans and insurance where a beneficiary is not named or the estate is the named beneficiary. The Secondary Will should only include the assets that the estate trustee can deal without needing probate. If you can name all assets and a beneficiary, then you should absolutely do that. For TFSAs there is a difference between just getting the funds and getting the money (and room) added to yours as a spouse.
If money is tight, consider contributing any cash that grandparents, uncles and aunts give to the kids for holidays and/or birthdays every year. $2500 dollars should be added to an RESP every year if cash flow allows, no matter how the money is coming from. Parents should fund their own Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) before going above and beyond with the kids RESP. Some people tend to continue contributing past the $2500 a year before contributing or maxing out their TFSAs and RRSPs.
But life can slip by very quickly. What if you already have a child in college or university?
Claiming a Tuition Tax Credit
Whether your child is a full-time or part-time student, they can claim an amount for tuition while enrolled at a qualifying post-secondary education institution. To claim the tax credit, they must file their income taxes and complete both the federal and provincial Schedule 11 forms. They will have to download the T2202 (Tuition and Enrolment Certificate) slip from their college or university’s web portal. The form will show the amount of eligible tuition fees paid for the year. The student doesn’t have to submit the tax slip, but should keep it just in case the CRA asks to see it. They should also keep their Schedule 11 tax form for the same reason. The non-refundable tax credit will give your child a tax break and should help with the ever-increasing cost of college and university.
Transferring Unused Credit Amounts
If your child has a part-time job and can use some or all of the current year credits they have to use, they should. They may be able to reduce their taxes owing to zero. If they don’t have enough taxable income and don’t need to claim the full tuition amount, the unused portion can be transferred or carried forward to a future year.
Your child can transfer up to $5,000 of the tax credit. If they use $1,000, $4,000 of the credit can be transferred to you, a grandparent or a spouse/common-law partner. Only current year credits apply. The student must write on the back of the T2202 slip, “I transfer $___ to ___“ and sign it. This part is key, and probably the most common reason this claim gets denied if CRA audits. Parents and grandparents can claim the leftover amount on Line 32400 of their tax return. The student must include the T2202 on their income tax return for the tax year the slip was issued if they are transferring or carrying it forward.
Tax on COVID-19 Benefits
Did you or your child receive the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB) or Canada Recovery Caregiving Benefit (CRCB) payments? These are considered taxable income, so enter on return the total of the amounts received. You should receive a T4A (for benefits issued by the CRA) and/or a T4E (for benefits issued by Service Canada) tax slip in the mail with the information needed.
If you received the CERB or CESB, no tax was withheld when payments were issued, and you may owe tax when filing your 2020 tax return. If you received the CRB, CRSB, or CRCB, 10% tax was withheld at source. When you complete your personal income tax return, you may need to pay more (or less), depending on how much income was earned in 2020. If you made less than $75,000 total income for 2020 and got any COVID-19 related benefits and you owe money on your 2020 taxes, you are allowed to wait until next year to pay.
If your children are still small, get saving for their future higher education with a RESP. Then consider including it in your estate planning, to ensure those contributions go towards their education. Remember to fund your own RRSP or TFSA first though, since most people tend to under-fund their retirement. If your children are already college-age, remind them to take advantage of those tuition tax credits or transfer any unused credit amounts. Finally, remember that any COVID-19 related benefits are considered taxable income, so be sure to include those amounts on your 2020 tax return.