Managed Money Reporter Newsletter — Issue 172, June 2001


Editors: Carl Spiess & Allan McGlade


Featured Articles



Why you should start saving now...

The rising costs of higher education! In the 1990's post-secondary tuition costs more than doubled, exceeding by far general inflation and the increase in family incomes. Depending on the program, three or four years at a typical university can cost anywhere from $10,000 to $20,000 in tuition alone. If a student lives away from home the price tag is significantly higher. The reasons for the escalating costs of education are:

  • General inflation
  • Fewer restrictions on how much universities can charge
  • Government cutbacks

Yet, ironically the importance of getting a post-secondary education increases every year. It is estimated that already, nearly seven out of ten jobs require a post-secondary education. By the time today's children are ready for a postsecondary education the costs will be even higher.

RESPs and the Canada Education Savings Grant (CESG)

An RESP (Registered Education Savings Plan) is generally a tool to help you save for your child's education:

  • It is registered with the government and the earnings growth is tax sheltered within the plan, which is why it should be your first choice for an education savings plan.
  • Currently, you can contribute up to $4000 a year, per beneficiary. The lifetime maximum is $42,000 over 21 years, per beneficiary and the accounts can be kept open for up to 25 years.
  • Every RESP beneficiary under age 18 will be eligible to receive a grant of up to 20% of the first $2,000 contributed each year ($400 maximum per year).

An account can be held for anyone under 21 years of age, but we usually recommend that you start when they are quite young to allow for the benefit of maximum growth.

What happens to the RESP if they don't go to school?

If for any reason your chosen beneficiary does not pursue higher education, you can either name another beneficiary to the RESP plan or transfer any unused income to your (or your spouse's) RRSP. You can transfer up to a $50,000 limit – in accordance with your RRSP contribution limits (client must be a Canadian Citizen and the RESP must have been in existence for at least ten years). You can also choose to have the income refunded to you with an additional 20% tax applied on top of the marginal tax rate. Also, any CESG grant needs to be refunded to the government.

Who can contribute?

Any person can set up and contribute to an Individual RESP Plan, including parents, grandparents, aunts, uncles and even friends. For family plans the contributor must be related by blood or adoption to the beneficiaries.

Individual Plans vs. Family Plans

We generally recommend a family plan in most situations if you have more than one beneficiary. There is more flexibility with the contributions, it's also consolidated and there is no requirement that beneficiaries draw equally from the plan – however, caution should be exercised so that the older children do not use up all the savings leaving the younger child in a financial shortfall.

RESP Withdrawals

Principal contributions can be withdrawn at any time, for any purpose, while the grant portion and the earnings or income of the RESP can only be used for educational purposes.

Education Assistance Payments (EAPS) are taxable in the student's hands as income when withdrawn and may be used for tuition, books, lab fees, equipment, accommodation, and even transportation relating to attendance at a qualified program at a recognized postsecondary educational institution. Most full-time post-secondary educational institutions are eligible.

Savings Suggestions

Think you might be short when the time comes to cash out? To help close the gap, we suggest you consider the following additional options for funding your savings:

  • Make lump sum annual contributions from bonuses or tax refunds.
  • Contribute cash gifts from family, friends and relatives.
  • Invest a portion of the children's earnings from part time and summer jobs.
  • Consider borrowing to make your contribution and get the government grant.

Registered Retirement Savings Plans (RRSPs) vs. RESPs

Keep in mind that the best tax savings opportunities are in maximizing your RRSP contributions. The return or savings that you would benefit from with the RRSP would be greater than any grant you would receive from the government. This would provide you with the best opportunity to increase your family's net worth. For example, if you are in a 50% tax bracket, you could be looking at getting 50% of your RRSP investment back from the government as opposed to a 20% government grant.

Should I open an RESP or a Trust Account?

For In Trust accounts:

  • There are no restrictions on how much can be invested
  • There is no penalty should the child not pursue post-secondary studies
  • Funds automatically become child's property at age of majority
  • Can be used for any purpose beneficiary chooses
  • Anyone can contribute

If your RRSP contributions are maximized, an RESP should be your first choice, strictly for the tax sheltering opportunities as well as the grant. A trust account however is a good complement to an RESP if you are looking at saving for education and you have already put in the maximum for your RESP.

Scotia Young Investors Fund

For decades, parents have been buying or wanting to buy their kids shares in Disney or Irwin Toy and other such companies as an investment for school or for the future in general. Since making small investments in stocks can be costly and choices are limited, there is now a great alternative!

In a recent issue we announced a fund that Scotia Funds had recently introduced called the Scotia Young Investors Fund. The mutual fund targets the interests of young people by holding companies that they may have a direct interest in, such as Disney or Nintendo.

Since we announced this fund, we have had quite a few inquiries about who this investment is best suited for. So, we recently contacted the fund managers to find out more details.

The objective of the fund is to earn above average growth, while maintaining a focus on companies with recognizable brand names and a strong market share. They primarily have been under-weighted in telecommunication and technology companies and over-weighted in consumer cyclicals.

By investing in equity securities of medium and large companies around the world that affect the lives of children or teenagers, this fund encourages young investors to take an active interest in investing. With a single investment, the Scotia Young Investors Fund gives you and your children a well-diversified portfolio.

As the fund is directly invested in the equity markets, this is a recommended long-term position. Some of the holdings in their portfolio include:

Toys R Us Sony Corp.
PepsiCo Inc. Mattel Inc
Walt Disney Co. WalMart
Honda Motor Co. Harley Davidson Inc.

The Scotia Young Investors Fund is a great investment for a Registered Education Savings Plan or for ‘In Trust' accounts in order to save for a child's education. Since there is no foreign content limit in either RESP's or In Trust accounts this fund is also a good medium of introducing your children to international investing.
 

 



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E. carl.spiess@scotiawealth.com
    allan.mcglade@scotiawealth.com

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