Whether you want to make sure a grandchild can afford higher education, give someone a more secure future, or help a child get out from under debt, there’s a way to make it happen
By Olev Edur
As the gift-giving season approaches, perhaps this year you’re thinking about giving the kids or grandkids something that will have a lasting financial benefit. If so, there are many options available that could more than pay their own way in terms of providing financial assistance and perhaps some financial acumen. The following are a few ideas to consider.
Registered Education Savings Plans (RESPs)
RESPs were created in 1998 by the federal government to help parents (and grandparents) put money aside for a child’s post-secondary education; various types are available from virtually all Canadian financial institutions. The basic idea behind all of them is that you (the “subscriber”) open a plan designating a child or grandchild as beneficiary and start contributing. (There’s a $50,000 lifetime RESP contribution limit per child/grandchild, so first check whether they already have one going.)
You get no tax deduction for your contributions, but money in the plan compounds untaxed, and, as a bonus, the government will kick in a considerable amount. There are no annual contribution limits for RESPs (you could put in $50,000 all at once), but there’s a big benefit to stretching it out: each year you contribute, the government will provide a Canada Education Savings Grant (CESG) equal to 20 per cent of the first $2,500—that’s up to $500 cash each year—to a lifetime CESG limit of $7,200 per child. Children from low-income families may be eligible for an additional Canada Learning Bond (CLB) of up to $2,000.
Down the road, when the child or grandchild withdraws money from the RESP for educational purposes, only the grant and growth portions are taxable (contributions were as income before going into the plan), and student incomes are usually so low that there’s no tax at all. And, by the way, there’s no need to rush to college—RESPs are valid for 35 years. (Contributions are limited to 31 years.)
If the RESP proceeds aren’t used by the beneficiary for educational purposes, the grant and bond money must be repaid and plan growth becomes taxable in the subscriber’s hands. If you have a life partner, you may be able to avoid immediate taxation by rolling RESP proceeds into a spousal RRSP (provided you have adequate RRSP contribution room available).
There are plans for individual children and family plans for those who have more than one child. Leslie McCormick, senior wealth advisor and portfolio manager at Scotia McLeod in Toronto, says the latter is a good option. “If it isn’t used by the designated child, then getting money out of a RESP can be challenging,” she says. “With a family plan, if the first child doesn’t use the money, it can be used by the others.”
McCormick cautions, however, that problems can arise if you pass on before the money is all used, because RESPs are considered part of the subscriber’s estate despite their having a beneficiary designation. “You must designate a successor holder for the plan or it will need to be collapsed, the grant money returned, and your estate must pay tax on plan growth,” she says. “It would also be subject to probate fees, so review your will and make sure it provides for a successor—it could be your spouse or the grandchild’s parents—to ensure the money will be used as intended.”
Bank and Savings Accounts
Another way to invest in a child’s or grandchild’s future, and perhaps teach them a bit about finance, is to open a bank account in his or her name and contribute some assets that he or she can watch grow over the years. There’s no minimum age to have a bank account in Canada, and, in fact, all the major banks as well as many other financial institutions have one or more “junior” accounts. They’re generally fee-free, and many even offer cash incentives. Some examples include:
– BMO Kids Account and Plus Plan Chequing Account
– Canadian Western Bank Youth Account
– CIBC Smart Start
– National Bank Minimalist and Modest youth accounts.
– RBC Leo’s Young Savers Account
– Scotiabank Getting There Savings Program
– TD’s Youth Savings Account and Student Chequing Account.
There may, however, be tax consequences to the assets (“gifts” in tax parlance) you put into young children’s accounts. In particular, what are known collectively as “the attribution rules” dictate when you are responsible for tax on the income earned from gifts to children.
“There’s no problem with attribution if the child receiving the gift is of the age of majority, but with younger children, any interest or dividend income from these investments will be attributed back to you and taxed in your hands,” McCormick says. “Capital gains, however, accrue to the child regardless of age, and won’t be attributed back to you.”
If you intend to put capital gains-generating assets such as corporate shares or investment fund units into a child’s or grandchild’s account, McCormick cautions that this would be deemed by CRA to be a disposition of those assets, and you’d have to pay tax on capital gains accrued from your original purchase date up to the date of disposition.
You can’t open a brokerage account for a minor child or a tax-free savings account (TFSA), and a minor would need a letter of consent from a parent or legal guardian to open an RRSP. They also would need a social insurance number (SIN) and have to be receiving payments from work (“earned income”) in order to build RRSP contribution room. Once they’re of majority age, you can give freely without attribution.
Life Insurance Products
Life insurance has a long history when it comes to providing for loved ones’ futures. This can mean not only traditional life insurance policies but also annuities and a host of “segregated” investments. The insurance-industry equivalent of mutual funds, “seg funds” offer a wide variety of investment options ranging from money market to equities, with proceeds that are tax-free and bypass probate, going directly to beneficiaries. (Life insurance can also be a valuable estate-planning tool in many ways, such as providing tax-free cash to cover estate tax liabilities.)
Seg funds come with performance guarantees—for example, you must receive a minimum of 75 or 100 per cent of your original investment as a maturity or death benefit, regardless of what the markets do. “Segregated funds provide growth potential and liquidity, and the added benefit is the insurance feature,” says Selene Soo, director of wealth insurance at RBC Insurance in Toronto. “It helps protect your money.”
Soo acknowledges that these guarantees come at a price, usually in the form of added fees or caps on growth, but the measure that counts is what’s left at the end of the day. If you’re shopping around, investment cost/benefit comparisons should be based on returns net of all taxes and fees. The tax-free proceeds of seg funds can be a big plus, as can avoiding probate, especially in the high-fee provinces of British Columbia, Ontario, and Nova Scotia.
Annuities, meanwhile, can provide an ongoing income stream, whether for yourself or for a loved one. When they’re combined with other insurance products (see below), the result can be a unique solution to the question of how to help the kids or grandkids. You can discuss the possibilities with an insurance representative.
Trusts and Annuities
There are situations in which a retiree wants to provide for a particular person—a young grandchild, perhaps, or someone with disabilities, or maybe even a spendthrift relative—but is concerned that the person lacks the ability to deal with large sums. What’s desired instead is a way to ensure a stream of steady payments in one’s absence, and the traditional solution—for those who can afford it—is to put the assets in trust.
With a trust, you can retain total control as long as you live, dictating how the funds are to be invested and how and when they are to be dispersed. You can change the terms at any time (provided the trust is not “irrevocable”), and then in your absence the trust will continue to function as you have dictated.
There are, however, costs to setting up a trust as well as for administration—legal and accounting fees can be $1,000 a year or much more, depending on complexity; some lower-cost “off-the-shelf” solutions may be available online, but you need to be careful when buying from the Internet. Trusts can be complex entities, so research the subject and speak with someone at a trust company to get more specific details.
Another option is to buy an annuity in the person’s name. An annuity would be less costly than a trust but also less flexible—once the money goes in, the arrangement is fixed until the end of the term (typically to age 90 or for life). You can, however, get deferred annuities with payments that start when you want, rather than right away. And with some annuities, you can, for example, opt for inflation-adjusted payments or other features.
Barry Fish, a lawyer at Fish & Associates in Thornhill, Ont., cautions that, in Ontario, if the annuity is purchased after death—that is, by your estate—then the beneficiary can elect to take a lump sum instead. In other words, buy it yourself; don’t leave this task to your estate. This may be the case in other provinces, but the rules regarding estates and probate can vary by jurisdiction, so legal advice is always recommended.
RBC Insurance’s Guaranteed Investment Funds offer another option, whereby the death benefit is automatically transferred to an annuity. You can select the annuity type (term or life), the investments, payment frequency, and payment start date, with optional features such as guaranteed income periods and survivor benefits. And as noted above, seg fund proceeds bypass the estate and the tax authorities.
Whatever you do by way of providing posthumous financial help, though, Fish cautions that if the chosen beneficiary qualifies for a federal or provincial income subsidy such as the Ontario Disability Supports Program (ODSP), you must be careful to stay within the income guidelines imposed by the program to avoid jeopardizing his or her benefits. Similar income constraints would apply to any province/territory’s disability-related benefits and tax credits.
While the possibilities discussed above involve ways to provide continuing benefit to the recipient, there are still cases in which cash is king. A timely cash injection can have far-reaching benefits, especially for, say, a young adult grandchild struggling with student-loan debt and perhaps his or her first mortgage or perhaps a middle-aged child facing sudden medical or business expenses.
Jerry Willison, a 61-year-old Vancouver retiree, recently sent his only daughter in England a sizable sum for debt settlement. “I figured I was paying off not only her school loans and some of the mortgage but also all the interest she would have had to pay over the years,” he explains. “Now that she can afford higher payments on the mortgage, she says she’ll be done with it in another couple of years, so there’s that, too.”
Another reason for the immediate generosity: Willison learned that while gifts to children are tax-free in England (provided the giver lasts at least seven years afterwards), inheritances of more than £350,000 (about $600,000) are taxed. “She’ll be getting most everything eventually, and I’d like as much as possible to be tax-free,” he says. “I may send her more soon, even if she doesn’t need it. Then she’ll have to learn how to invest it properly,” he adds, partly in jest.
Debt repayment has become increasingly valuable for young folks in Canada. After all, interest on personal loans must be paid with after-tax dollars, and while rates had been low for four decades, they’ve suddenly shot up and will likely rise further. The interest rate on a lingering Canada Student Loan (CSL) of $20,000, for example, was maybe 3.5 per cent in 2021 but nearing six per cent by mid-2022. At that rate, someone with a median Canadian income of $55,000 would need to earn about $2,000 pre-tax just to pay the year’s loan interest; at nine per cent, it would cost more like $3,000.
However, our advisors were unanimous in warning that regardless of how you give, you must first ensure that your own long-term needs won’t be jeopardized. Prices and interest rates rose dramatically this past year, causing financial problems for many retirees, and ongoing inflation can rapidly compound the damage, so be generous in calculating your own future financial needs before giving anything away.
Finally, this article provides brief summaries of some of the options available for retirees who want to make lasting contributions to the lives of their loved ones, but there are exceptions to almost every rule in the tax and investment books and almost always some unexplored options. When it comes to estate plans involving sizable assets, independent financial advice (ideally fees-only) can be invaluable.