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Taking Advantage of Tax-Driven Education Savings

by Evelyn Jacks

There has been good news in 2004 for average investors who are saving for their children’s postsecondary education. This is in large part due to federal budget changes announced in March 2004, which beefed up RESP (Registered Education Savings Plan) contribution benefits for lower-income earners and introduced a new Canada Learning Bond. Investors should take full advantage of the RESP measures to maximize their education savings.

The RESP News
Since 1996, Canadians have had the opportunity to make RESP contributions for children under the age of 21 up to a maximum of $4,000 a year or $42,000 as a lifetime limit.

In 1998, the federal government sweetened the plan with the addition of a new feature – the Canada Savings Education Grant, a tax-free contribution by Ottawa that amounts to 20% of RESP contributions made for a child. The maximum grant is $400 per year, an amount based on the first $2,000 of annual contributions. (Note that an annual maximum CESG of $800, or 20% of a $4,000 contribution, may be claimed in a year if unused RESP contribution room is available from prior years. This is known as a “make-up” contribution.)

The March 2004 budget proposed to increase the grant rate on the first $500 of contributions made to an RESP by low-income families on or after January 1, 2005, in years before the child turns 18.

The proposed rates are as follows:
• For families with qualifying net income of $35,000 or less, the rate will be 40% of the first $500 contributed to the RESP. This will allow for an additional contribution of $100 under the enhanced grant plus the $400 normal grant, for a maximum grant total of $500.

• For families with qualifying net income between $35,000 and $70,000, the rate will be 30% of the first $500 and 20% of the remainder. This will allow for a maximum of $50 under the enhanced grant plus the $400 normal grant for a maximum grant total of $450.

• The net income levels expressed in 2004 dollars will be indexed after 2004, when the program comes into effect. The following rules apply to these new enhanced CESGs:

• The qualifying family net income figure used for these purposes is the same as that used to compute the Child Tax Benefit; that is, the family net income of the second preceding taxation year.

• The enhanced rate will only apply to maximum contributions of $500 made in the year and not to “make-up” contributions for prior years.

• If the contributor to the RESP is not the primary caregiver (i.e. recipient of the Child Tax Benefit), then the enhanced rate will only apply if the CTB recipient consents.

• If more than one RESP has been established for the child, the enhanced rate applies to a maximum of $500 contributed jointly to all RESPs where the child is the beneficiary.

• If amounts are withdrawn from the RESP and not used for educational purposes, then the enhanced rate will not apply to contributions until the amounts withdrawn are re-contributed.

The Canada Learning Bond
The March budget also introduced a new type of educational investment opportunity for lowincome Canadian families with children. The Canada Learning Bond is an “entitlement” that will be made for each child born after 2003 if the National Child Benefit (NCB) Supplement, as computed under the provisions of the Child Tax Benefit, is paid on behalf of the child. The NCB is currently payable in full to families whose net income is below $22,764 and in part to single child families with income up to about $27,000.

The Canada Learning Bond transfers will not affect the limits of contributions to the RESP. Neither will these amounts be eligible for the Canada Education Savings Grant.

The amount of the Canada Learning Bond entitlement is $500 the first time that the child is eligible for the NCB (that is, the year of birth or a subsequent year if the family net income is too high in the year of birth). The entitlement is $100 in each subsequent year that the family qualifies for the NCB until the year the child turns 15. Once the child is 16, the CLB is no longer allocated to the child.

In order to turn the entitlement into real money, the CLB then must be transferred into an RESP for the benefit of the child. This can be done at any time before the child turns 21.

Prior to age 18, the primary caregiver must authorize the transfer. After the child reaches age 18, if the CLB has not been transferred to an RESP, the child may request the transfer. If the CLB is not transferred to an RESP by the time the child turns 21, the entitlement will be lost.

Interest will not be paid by the government on unclaimed Canada Learning Bonds, so it will be important that the CLB be transferred to an RESP as quickly as possible so that the amount can begin to earn interest or other investment income.

Financial advisors will want to tell their clients before year-end that in the year the initial amount is transferred to an RESP, an additional $25 will be added by the federal government to help offset the cost of opening an RESP account. Some recommendations:

A. In the year the baby is born, if the parents are eligible for the National Child Benefit Supplement, the parents should:

• Obtain a social insurance number for the child (required for an RESP);

• Open an RESP account with the new child as beneficiary;

• Apply to have the Canada Learning Bond amount be transferred to the new RESP.

B. When the time comes to remove and transfer the amounts from the RESP to the student, note the following tax consequences:

• Withdrawals used to support educational costs are called Education Assistance Payments, and an apportionment of the CESG, the CLB and the investment earnings are taxable to the student. (Planning around the student's "tax-free zone" and use of RRSP contribution room is important to minimize or eliminate tax on the EAPs and maximize refundable GST Credits.)

• Amounts not used for educational purposes are handled differently. The CESG and CLB will be returned to the government and the investment earnings in the RESP will be classified as Accumulated Income Payments, which can be taken in cash (but with a penalty of an additional tax of 20%; to compute see form T1172). Or, the amounts can be rolled over to the resident subscriber's RRSP without penalty, provided there is sufficient RRSP room, the RESP has been in existence for at least 10 years and the beneficiary is at least 21 years of age.

The government is expected to release additional proposed rules concerning the CLB and the enhanced CESG in the coming months.

Vital RRSP News
Entitlement to various government refundable and non-refundable tax credits are based on net family income (line 236 of the tax return). RRSP planning and contributions thus become very important in ongoing monthly cash flow and education planning, as well as retirement savings, because every RRSP deduction will reduce the net income levels used to qualify for the new CLB entitlement and the Child Tax Benefit. Good planning by financial advisors and their clients can maximize these tax preferences.


Evelyn Jacks is the author of 30 best-selling books on the subject of personal income taxation, and the President of Knowledge Bureau, Inc., Canada’s leading professional education publisher in the tax and financial services industry, specializing in delivering courseware and information services to knowledge-based practices. For more information call toll free 1-866-953-4769 or visit

This article is written to be of a general nature and neither the author, her company, employees, subcontractors or others associated with The Knowledge Bureau can take responsibility for any results, positive or negative, taken by any persons. While the author received a fee to write this article, she is not in the business of providing advice on investment products and is not registered and licensed to do so, nor does the author have any compensatory relationship, or beneficial ownership regarding the sale of investment products discussed herein

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