1. The Education Savings Plan
An Education Savings Plan (ESP) is a trust with three parties: the subscriber, the beneficiary and the plan sponsor. The subscriber is the person, typically you as a parent or grandparent, who contributes capital to the ESP. The beneficiary, typically your child or grandchild, is the person of your choice who upon attending a program of full-time post-secondary studies, will receive the investment returns earned by your contributions. The plan sponsor is simply the financial institution offering the ESP.
Education Savings Plans offer two powerful tax advantages over regular savings, which make them much more effective solutions to the high cost of post-secondary education.
Tax Advantage #1: Although the contributions you make to an ESP as a subscriber are not tax deductible, they compound in a tax-sheltered environment, just like an RSP. All investment returns, including capital gains, interest and dividends, compound untaxed, meaning that they can grow up to twice as quickly as regular savings.
Tax Advantage #2: Once the ESP's beneficiary begins attending a full-time post-secondary program of studies, education assistance payments consisting of the plan's accumulated investment income and capital gains are paid out to the beneficiary. These education assistance payments are deemed to be income in the beneficiary's hands and taxed as such as his/her marginal rate. Your beneficiary's tax bracket will undoubtedly be a good deal lower than yours, so this can represent a considerable tax saving.
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