Many people move to give their children access to better education.
Yet depending on when those children immigrate, they may not be able to take advantage of the Canada Education Savings Grant.
To benefit from the program’s 20% matching, a sponsor must contribute at least $2,000 to an RESP the year the child turns 15, or at least $100 in any of the four years before he turns 16.
Take a child of wealthy immigrants who arrives in Canada when she’s 14.
To maximize her grants, her parents should contribute $42,500 at age 14, and $2,500 per year at ages 15, 16 and 17. The total grant money would be $2,000, which represents 20% of each annual $2,500 contribution.
“Don’t put $50,000 in one year and leave it, because you won’t get the grants,” says Gina Macdonald, a Vancouver-based R.F.P. with Macdonald, Shymko & Co.
What if parents want to contribute more?
“There are two ways: a TFSA for children 18 or older, or an in-trust account for children younger than 18. But the TFSA is more tax-efficient,” says Corina Murdoff, a Calgary-based advisor with Macquarie Private Wealth.
But again, the entry date matters. “Contribution room is based on how long you’ve been able to access the TFSA,” Murdoff says. An 18-year-old Canadian resident’s TFSA room starts at $5,000; as does that of an adult immigrant who’s just arrived in Canada.
How to invest the funds
Murdoff uses lower-volatility investments to ensure money will be there when needed.
For children up to age 10, she uses a bond ladder, specifically with strip bonds that will mature the first year they go to school.
“A $10,000 15-year bond may cost $6,200 today, but at maturity they’ll get $10,000. The $3,800 growth is tax-sheltered in the RESP.” There’s risk of volatility if interest rates go up, but “if anything dramatic should happen, we would be able to sell them into the market and recover our cash.”
For children aged 10-to-18, “I do a balanced portfolio that generates monthly, quarterly, and fixed income: utilities trusts pay monthly; preferred shares and dividend-paying stocks pay quarterly. I’d keep fixed-income maturities between one-and-three years” due to possible rising interest rates.
If a family only has a few years before the funds will be needed, Murdoff uses preferred shares of financials or utilities in a 60/40 allocation.
“If interest rates rise, bond prices will go down. Then I’d look at new issues at higher yield and purchase those as rates rise. I’d go 55/45 [and] rebalance to focus on income growth and capital preservation.”
For risk-averse clients who still want growth, Alex Fan, district vice president, Retail Distribution with CIBC in Vancouver, suggests advisors “use the grant portion to do aggressive investments, without eating into principal.”
And to allay fears, show that instead of running 20% aggressively and 80% conservatively, you’ve actually carved off grant dollars.
Macdonald avoids high-expense investments like target-date funds; instead suggesting indexing and laddered GICs.
She adds that if clients don’t spend all education grants, they have to repay them. So “don’t hoard the money,” she says. If 25% of the account is grant money, every dollar withdrawn spends $0.25 of the grant.