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.

RESP

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.

Funding Your Grandchild's Education

Informal trust

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.

Non-registered account

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.

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5 Comments

  1. cashinstinct on September 2, 2016 at 3:38 am

    Thanks for talking about RESP.

    You need $36,000 contributions per children to get maximum grant of $7,200 CESG per children ($7,200 / 20%) considering current rules.

    It would be $2,500 per year for 14 years + $1,000 in 15th year if the parents want to get it as soon as possible.

    Therefore, in this example, the grandparents could invest $14,000 per children in an RESP. If they have good relationship with the parents with the capital, it would be essier to give them the money to invest.

  2. Tom on September 2, 2016 at 5:26 am

    Unbeknownst to their parents, I have started monthly contributions to an e-savings account for each of my two (and soon to be three) grandkids. I just wish I had started when the first two were born!
    My plan is to someday give each one the money to be used for schooling, a down payment, or whatever. My wife and I will know when the time is right.
    Since I started late and am playing catchup, I also save loonies and tonies and every so often deposit these into one or the other account.
    Eventually I’m thinking I’ll switch these to low cost index funds.

  3. Todd on September 2, 2016 at 6:00 am

    We maximize RESP contributions (for annual grant) but I don’t expect RESP alone to be sufficient. Various family members give occasional gifts for their education. Those go into my TFSA and are earmarked accordingly. If you have TFSA room I think this works well.

  4. Cashinstinct on September 2, 2016 at 9:49 am

    If you have TFSA room, for contributions above the maximum annual grant, it’s better to use TFSA instead of RESP, since income and capital gains in TFSA won’t be taxed.

    The $14,000 “extra” room in RESP (above $36,000) is useful only if their TFSA is maxed.

  5. James Free on September 5, 2016 at 8:21 am

    So another very effective way is to place a participating whole life policy on the child when young, say 3 years old. Premiums are low. This will allow cash values to build which can be used as needed and/or borrowed against to fund education, business startup, etc. Grandparents can pay the premiums and exercise the additional deposit options. By the time the child is ready for post secondary, the policy could be paid up. Equally important is the evidence of insurability that has been established. If there are any adult on-set illnesses, the insurance is in place for life. This is an excellent way to transfer wealth to the next generation.

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