Tax Credits and Savings Plans for College Age KidsBrian Jang ON April 9, 2021
New parents may be surprised to find themselves discussing their little one’s post-secondary education within days of the child’s birth. It can seem a bit strange to start planning for the final years of a child’s schooling long before they begin kindergarten, but with the ever-increasing cost of education, it makes sense; it can take years to accumulate the necessary funds for higher education.
Some parents might be concerned about whether the cost of their child’s education will impact their own plans for the future. Will they be able to save enough? Will they have to delay retirement? Will paying for their child’s education leave them with a sense of entitlement or leave them financially dependant?
But for all the potential negatives, there are also positives: your child won’t be burdened with student debt, for one thing, and it will leave them with more opportunities while also providing you with some tax benefits.
Here are some options to consider when planning for your child’s post-secondary education:
Registered Education Savings Plan
Shortly after the birth of your baby, you will likely start hearing about opening a Registered Education Savings Plan. An RESP is an investment savings account that has been sponsored by the government as a way of encouraging parents to save for their child’s education. At least 20% of your contribution will be matched by the federal government, to a maximum of $2,500 each year. Further, a grant of as much as $7,200 will be added during the course of the plan.
Contributions are only taxed when the money is withdrawn to cover education fees. The child will receive it as an addition to their income at a time when they also have a tuition credit that can help reduce their income tax.
One important fact to note about any RESP that you open for your child is that is belongs to you. This means it will be counted as an asset in the event of your death, rather than passing automatically to the beneficiary. Because of this, you should make it a part of your estate planning by stating in your will what you wish to happen. Rather than having it distributed with the rest of your estate, you may wish to have it maintained for your child. Your will should include a specific clause to this effect.
Each year without fail, you should be contributing $2,500 to your child’s RESP, provided cash flow allows, even if it means contributing gift money from holidays and birthdays. You may already have a child in college or university, however, so what do you do in that case?
Claiming Tuition Tax Credits
If your child is enrolled at a qualifying post-secondary school, they can claim a certain amount for tuition as a non-refundable tax credit, regardless of whether they are studying full-time or part-time. To do so, they will file their taxes and complete the Schedule 11 forms for both their federal and provincial returns. This requires that they go to their school’s web portal to download the T2202 (Tuition and Enrolment Certificate), which will show the year’s eligible tuition fees. While this sleep does not be submitted, both it and the Schedule 11 tax form should be kept in case the CRA wishes to see them at a future date. The recipient of the transfer claims the amount on line 32400 of their return.
Unused Credit Amounts
Your child is able to transfer unused credit amounts or carry them forward to a future year. For example, they may be working a part-time job and not earning enough taxable income to claim the full tuition amount. If so, they can transfer up to $5,000 of the credit. By writing “I Transfer $___ to ___” and signing on the back of the T2022 slip, they can transfer the amount they wish to a parent, grandparent, spouse, or common-law partner. The recipient of the transfer claims the amount on line 32400 of their return. If the student is transferring or carrying an amount forward, they are required to include the T2202 on their return for the tax year in which it was issued.
If you or your child received 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, the total of the amounts received must be entered on your return as they are all considered taxable income. The information that you need to enter can be found on a T4A or T4E slip (depending on whether the benefits came from CRA or Service Canada) that you will receive in the mail.
In the case of the CERB and CESB, no tax was withheld at the time of issuance, so you may owe tax when you file your 2020 return. The CRB, CRSB, and CRCB had 10% tax withheld. If your total income was less than $75,000 for 2020, you received a COVID-19 related benefit, and you owe money, you will be permitted to wait until next year to pay.
It’s important that you save as much as you can for your young child’s future education with an RESP, but remember to plan for your own future with either an RRSP or TFSA. Many do not provide enough for their eventual retirement.
If you have older kids, remember that there are tuition tax credits available to them, as well as the ability to transfer unused credit amounts.
For help planning for your child’s post-secondary education, contact BCJ Group today.