The costliest mistake Canadian families with young children make with their tax refund

Toronto, ON - May 6, 2013 – As parents breathe a sigh of relief after getting their income tax returns filed on time, many have already started dreaming about what they will do with their tax refund. The average income tax refund is now approximately $1700 according to the Canada Revenue Agency.

There are multiple ways families can spend their refund including paying down the mortgage, springing for a new computer or television, going on a big family trip or topping up a Registered Retirement Savings Plan. And while these are all good options, parents with young children are making a costly mistake by overlooking an option that can provide the biggest benefit: contributing to a Registered Education Savings Plan (RESP).

If the average income tax refund in Canada were invested in an RESP from the time a child was born to when they turned 18 years of age, that child would have over $53,000 available to them for their post-secondary education (based on a five per cent rate of return and including the Canada Education Savings Grant). That means even if the current tuition rate for a four year undergraduate degree of $23,000 were to double over that time, the savings would still cover the tuition costs of a child’s post-secondary education.

“The number one thing Canadian families with young children should be doing is investing in their children’s RESP even before investing in an RRSP,” says Sherry MacDonald, President and CEO with the Canadian Scholarship Trust Foundation. “An RESP provides tax-sheltered growth on your savings but can also trigger additional contributions through the form of various government grants. This makes it a perfect place to park a tax refund. There is no better way to create a lasting legacy for your child.”

More than half of Canadian families have yet to invest in a Registered Education Savings Plan (RESP). In fact, only 43.6 per cent of Canadian children have an RESP in their name according to the most recent statistics from Human Resources and Skills Development Canada.

With an RESP, parents, guardians, relatives or friends can contribute up to $50,000 into the plan for each child. There is no annual contribution limit and the federal government will add a 20% matching grant (the Canada Education Savings Grant) - adding up to $500 into your RESP every year. Over the life of a plan, that could total an extra $7,200 set aside for your child’s post-secondary education. To maximize the amount of this grant, parents should invest at least $2,500 per year into their child’s RESP.

Income generated within an RESP grows tax free until the children are ready to enroll in a post-secondary program – including trade schools, CEGEP, college or university. Even then, the students only pay income tax on the income earned in the plan and any government grants as they are withdrawn. Since the income of most post-secondary students is limited, generally little if any tax is payable on the amounts withdrawn.

There are other real benefits to investing all or a portion of your tax refund in your child’s RESP depending on the province you live in. For example, Quebec residents are entitled to the Quebec Education Savings Incentive (QESI), and can get up to an additional 20 per cent on the first $500 contributed each year, and 10 per cent on the next $2,000. Saskatchewan residents may be entitled to an extra 10 per cent of their contributions up to a maximum of $250 in grants per child every year through the Saskatchewan Advantage Grant for Education Savings (SAGES). For the time being, until the grant is phased out, Alberta families are eligible for the Alberta Centennial Education Savings Grant (ACES), which provides families $500 when they first start an RESP plus another $100 when their child turns 8, 11, and 14 years old.

For more information, or to set up an interview our experts or a family in your city or province that is currently investing in an RESP for a story please contact:

Edyta McKay – Manager, Corporate Communications
CST Consultants Inc.
Office – 416 445-7377 x 303 Mobile – 416 602-2849
[email protected]