Question: I would like to contribute to my grandchildren’s education. Their parents already contribute the maximum amount to their RESPs each year in order to receive the government grant. What are my options?
Answer: The costs of post-secondary school are rising exponentially, so kudos to you for wanting to help your grandchildren with the gift of education.
To recap, for every eligible child, the first $2,500 of contribution to an RESP qualifies for the basic 20% federal Canadian Education Savings Grant (CESG). Assuming the RESPs were set up immediately after each baby’s birth and have been (or will be) fully funded each year since, the grants will be maximized in 14 years ($34,000 of contributions).
However, you are actually allowed to contribute a lifetime limit of $50,000. Although the additional $16,000 per child won’t receive any more government money you will be able to maximize the tax-deferred growth, especially if you contribute the funds in the early years.
Another alternative is to set up an informal trust account for each of your grandchildren. Because of attribution rules, you will be taxed on any income earned on the investments – interest and dividends – until the children reach 18 years of age. On the other hand, any capital gains through distributions or disposition of the assets is taxed in the child’s hands.
An advantage of “in-trust” accounts is that they are easy to set up at any financial institution at no cost. One of the main benefits is the money can be used in the future for any purpose – not just education.
The main disadvantage is that once the child reaches the legal age for their province (18 or 19), as the beneficiary of the trust they are entitled to full access and control of the money and can use it any way they like. If you have a problem with that, this is not for you. You may be better off paying the legal cost to set up a formal living (inter vivos) trust, which can be expensive. To make sure the trust is set up correctly, you’ll need to get professional advice particular to your situation.
Finally, you could open a non-registered account in your own name for the purpose of setting aside money for your grandchildren. You will have to pay the tax on all the interest, dividends and capital gains, but you will also have complete control over how – and when – it is distributed in the future.