If you start saving early, consider these education savings options that can provide you tax-savings as well:
Child Tax Credit
Deposit the child tax credit (starting with the first installment after your child is born) into an account in your child's name, so that the investment income earned on the child tax credit is not attributed back to you. This income has to be reported on a tax return for your child. As long as the child's total income is lower than the basic deduction of around $8,600, the income will be tax-free. This is the best way for you to start saving on a tax-free basis for a child's education.
Registered Educational Savings Plan (RESP)
This program enables you to split investment income and get a government grant for your child. You can invest up to $4,000 a year for 10 years into an RESP. Any investment income earned on this and the government grant (amounting to 20 percent or $400 of the first $2,000 contributed each year) is sheltered from income tax until it is used to pay for post-secondary education.
When your child is ready for post secondary education, all of the parent's contributions over the years can be withdrawn from the RESP tax-free. The remaining balance, which consists of investment income and government grant is then paid out to the child for education. The child must report it as income but with the significant deductions available to the child from tuition and education credits, little, if any, of this income would be subject to income tax. However, if your child doesn't use the RESP funds for post-secondary education by age 25, it will be subject to tax. For more information about RESPs, visit http://www.hrsdc.gc.ca.
Where To Develop Your Skills
Whether you're upgrading your own education or helping out your kids, finding the right school with the right program can take some effort. To help you in your search, we've assembled a list of trade schools all across Canada. In addition, for many, we've listed out the programs they offer.
A Capital Direct home equity loan could be used to finance courses at any of these schools. Take a look at the full list of Trade Schools in Canada.
Another strategy to split investment income involves the use of an in-trust account for the child. How this works is that you gift money to your child and the money is invested in a special account managed by you but held in trust for your child. Income from the in-trust investment account is attributed back to the parent, but capital gains are taxed in the child's hands. Keep in mind that funds in an in-trust account belong to the child, who can take complete control of the money at age 18.
If you are planning on returning to school yourself, take advantage of the Lifelong Learning Plan, which allows you to borrow funds from your RRSP. For more information, visit http://www.cra-arc.gc.ca. Or why not put your home equity to work for you. Home equity financing is an easy way to get your hands on extra cash, and it offers lower rates than conventional loans, lines of credit and student loans.
We can show you the pros and cons of each option and get you on the right path so you can focus on your studies rather than on your chequebook.
These strategies are in no way to be considered to be or should be used as a substitute for financial and legal advice from a registered financial planner or accountant. Always consult a professional before making any financial decisions or adjustments.