As a father of three and a financial professional, the coming school year, and the uncertainty attached to it, is very much on my mind. Even if your children, like mine, are still years away from post-secondary tuition fees, the sooner you start saving, the better your chances of reaching your financial goals. Money also gives you options should your child need tutoring (or, as is being hotly debated, you want to be able to consider opting out of public school during the COVID-19 pandemic).
Here are a few ways to help your children financially, regardless of their age or stage.
The most common saving tool for minor children is a Registered Education Savings Plan. An RESP is a tax deferred savings plan used to fund post-secondary education costs like trade school, college or university tuition and other expenses.
There are no tax deductions when a parent makes a RESP contribution, but the government provides a Canada Education Savings Grant (CESG) of 20% on contributions of up to $2,500 per year, per child (each named as a beneficiary in the plan), resulting in up to $500 in grants annually. If you’re unable to contribute some years, you can also catch up on contributions in future years, again receiving up to $500 in grants for each year you hold the RESP.
Low-income contributors may be eligible for additional government benefits, in the form of Canada Learning Bonds (CLBs) or other provincial incentives.
When future withdrawals are used for qualifying post-secondary education, the original principal is withdrawn tax-free and the government grants and investment growth are taxable to the child—usually at a low rate of tax, or even tax-free.
RESP accounts can also be opened by grandparents for their children’s children. This can be a good indirect way to help your own kids, by helping to alleviate the burden of saving for their children’s post-secondary costs on their own.
Similar to RESPs, Registered Disability Savings Plans (RDSPs) are a savings option for parents with children who qualify for the Disability Tax Credit (DTC). Savings are not meant for education costs necessarily, but instead as long-term savings for that child, particularly for retirement.
RDSP contributions are not tax-deductible, but qualify for government grants until the year a beneficiary turns 49. Families with 2019 net income of less than $97,069 receive $3 of Canada Disability Savings Grants (CDSGs) on every $1 of the first $500 contributed, and $2 for every $1 contributed on the next $1,000. As a result, a $1,500 contribution to a RDSP may be entitled to $3,500 of matching contributions from the government.
Families with income of under $48,535 may also qualify for different levels of Canada Disability Savings Bonds (CDSBs) as well. These bonds can provide as much as $1,000 of additional government grants.
Parents can open RDSPs for children, and grandparents can do so for their grandchildren as well.
RDSP withdrawals are similar to RESP withdrawals: They are taxable to the beneficiary, and the initial contributions can be withdrawn tax-free.
You can contribute to a Tax Free Savings Account (TFSA) for a child or grandchild. However, TFSA contribution room does not begin to accumulate until they are 18. Beginning in the year a child turns 18, a full year of TFSA room is available. There are no tax implications for a parent or grandparent who contributes.
TFSA contributions can be very flexible for a young person. Unlike contribution room in a registered retirement savings plan (RRSP), which is tied to earned income from employment or self-employment, there are no such requirements for TFSA contribution limits, which are set each year by the government (it’s $6,000 for the year 2020). TFSA withdrawals can also be taken at any time—tax-free—and used for education, a home down payment, or even to make future RRSP contributions, amongst other purposes.
An important consideration is that a TFSA belongs to the account holder. As a result, someone who contributes to a TFSA for a child or grandchild is effectively gifting them that money.
Given that real estate prices have risen so much in many parts of Canada, financial assistance with a first home is becoming more of a reality for parents and children, and there are a few different ways to do this.
Co-signing for a mortgage may seem like a simple solution, but it has its complexities. For example, when a parent co-signs, they are mutually responsible for the mortgage payments, even if they do not have an ownership interest in the home.
If a parent is on title and has an ownership interest in the property, there may be capital gains tax payable on the parent’s share of the growth over time. If a parent is not on title, they are responsible for the debt, but have no upside potential or control of the property.
If a parent gifts money to a child, and that child is in a relationship, that gift may eventually become subject to division in the event of a separation. The implications vary depending on whether the child and their partner are married or common-law; by their province or territory of residence; and other details. Loaning the money may provide more protection, but could also be more awkward for a relationship with a son- or daughter-in-law.
Occasionally, parents of young children consider buying real estate for them many years before they are old enough to move out on their own. This can be done formally using a family trust, or informally by buying a rental property that is notionally meant for the child. This strategy should be approached with caution, as there may be better and more flexible ways to save for a child’s future, like RESPs, RDSPs, or a parent’s own TFSA account. Beyond that, a well-intentioned parent who buys a condo in Montreal may find that child ends up going to school in Vancouver and never comes back east.
Insurance is an often overlooked way to help your kids financially.
In what’s probably the most common approach, a parent buys life insurance policies for their young children; I meet many adult clients whose parents did this for them years ago. Generally, the policies are relatively small and provide a fraction of a child’s future life insurance needs once they start a family of their own.
Buying insurance for adult children may be a better strategy. It could be 10 or 20 years after a child goes out on their own before they have a family and financial dependents, and so need life insurance to protect their income and ensure loved ones are taken care of. Some people never have any dependents like a spouse or kids.
But virtually everyone is someday dependent on themselves, and their own income, to cover their living expenses. Young people in their 20s and 30s are often woefully underinsured against the risk of disability and critical illness. If a child became disabled due to accident, injury, or illness, and was unable to work, having an insurance policy to protect them financially could be very beneficial.
There are more and more contract workers, self-employed consultants, and even full-time employees whose disability coverage is limited or non-existent. A parent should consider paying for a disability or critical illness insurance policy as a means of helping their young-adult children indirectly.
Doing the right thing
Perhaps one of the most important ways parents can help their children financially is by modelling good financial behaviour themselves. There are lots of opinions about the right and wrong ways to use money, and plenty of rules of thumb as well. I, for one, think that money choices are very personal, so it is hard to say what the “best” approach is with kids.
Regardless, concepts like budgeting and delayed gratification are important to teach, as well as helping kids understand that money should not be a source of anxiety, but a necessary tool in the adult world that they will need to learn how to handle.
Children need to hear their parents having conversations about money. That will help shape their money mindset just as much, if not more, than friends and social media. Some school curriculums are starting to include personal finance as part of students’ knowledge base but, as with many building blocks in a child’s education, what they learn at home, especially at a young age, is crucial.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
MORE ON SAVING:
- Investing tips for expectant parents
- How to protect family RESPs from being raided
- Using life insurance to leave your kids an inheritance
- How to get a bigger benefit from your RRSP contribution