Three Ways to Pay
When it comes to paying for this essential head start in life for your children, you have three options: pay as you go, pay later or pay now.
- Paying as you go means writing a cheque for 810.000 - $15,000 each year that your child is attending college or university - not exactly an appealing prospect!
- Paying later means taking advantage of student loan programs offered by various levels of government as well as by some post-secondary educational institutions. However, the huge debt load resulting from borrowing to pay for four or five years of post-secondary education will be a very heavy burden for a graduate just entering the labour force. And since your child will have to reimburse accrued interest as well, paying later actually means paying significantly more.
- The most sensible option is to pay now - to put money aside today while your children are still learning their ABCs, and invest that money wisely so that it grows during the time that remains before the tuition bills start rolling in. By paying now and allowing com pounding to work its magic, your child's post secondary education will represent a much smaller out-of-pocket outlay.
Taxation: The Achilles heel of regular saving
Taking concrete steps today will pay big dividends later when it comes time to begin writing those cheques for tuition, books, housing and other expenses. However, if you put your savings in a regular bank or investment account, up to half your returns will be lost to taxation which means you'll have to more than double the amount you set aside to meet future education expenses.
What about simply putting money into an account registered in your child's name? Granted, your child's marginal tax rate is probably a good deal lower than your own, but tax authorities have all but closed the door on this option. Attribution rules apply to investment income - meaning that all simple interest and dividend income earned on money you give to your minor child and invest in his/her name will be taxed in your hands at your marginal tax rate. The same is true if you lend your child money for no consideration, or at an interest rate below Revenue Canada's prescribed rate.
Income attribution applies to such transfers between any non-arm's length persons and a child, and that includes parents, grandparents. siblings and spouses. These attribution rules eliminate a good part of the tax advantage you might hope to obtain by going this route.
Fortunately, there is a solution to this dilemma; or, to be more exact, two solutions: the Education Savings Plan, and the "in trust" account. The following is an explanation of these two tax effective ways of saving for your children's post secondary education.
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