Tax Tips: Big Tax Refund? Use It for Education Savings

In the unlikely event that you have no plans for your tax refund, consider using it in a special way this year, especially if you’re a parent or a grandparent: help your kids or grandchildren with their education funding. One way to speed up the accumulations is with a contribution to the Registered Education Savings Plan (RESP).

The RESP can, in fact, be a very tax-efficient way to save for minors.  There is no tax deduction for contributing to the RESP, so principal withdrawals down the road are not taxable. Earnings, on the other hand, are taxable, but in the hands of the student, who generally has low income, thus attracting little or no tax.

Second, and very important in making the education savings decision, the government sweetens the deposits with the Canada Education Savings Grant (CESG).

The CESG amounts to 20% of your annual contribution for each beneficiary.  Each year the maximum grant is $500 per person ($1,000 if there is unused grant room from a prior year). The maximum lifetime CESG is $7,200.

An additional incentive, the Canada Learning Bond (CLB), provides up to $2,000 more to low-income families. The government provides $25 to cover costs of opening an RESP account and an immediate lump sum of $500. After this, an additional $100 is provided annually for up to 15 years, provided the family qualifies for the National Child Benefit Supplement (NCBS). For 2015 that income threshold was $26,021.

This NCBS and the Canada Child Tax Benefit will be replaced with the new Canada Child Benefit introduced in the March 22, 2016, budget. Details on how this will affect the Canada Learning Bond are yet to be announced.

Check it out with your Tax Services Specialist . . . but hurry, the busy month of April is upon us, and these folks are really busy.  (You may wish to do something wonderful for your tax specialist in the meantime, like bring in an extra strong cup of coffee!)

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