Most parents want to make smart financial investments for their children, both in order to save for university, but also to help their children develop a nest-egg of their own. There are many ways to invest for your children, and choosing the right strategy may even save you a few tax dollars while you’re putting money away.
First, let’s start with the smart ways of using the child-friendly savings and benefits vehicles.
RESPs. Saving for higher education is a priority for many families, which makes Registered Education Savings Plans (RESPs) one of the most common investments. RESPs are different from Registered Retirement Savings Plans (RRSPs) because RESP contributions are not tax deductible, they will not lower your taxes payable in the contribution year.
However, there are other tax benefits of RESPs. First, the money earned in your RESP is allowed to grow tax-free. Secondly, when the money is withdrawn, it is taxed in the hands of the student, who usually has little to no income and therefore pays little tax. RESP money can be invested in mututal funds, stock, bonds and other vehicles.
RESPs can be opened by parents, grandparents, aunts, uncles and other interested parties for child(ren) with a Social Insurance Number (SIN). Students can use their RESP funds towards several types of post-secondary expenses, including tuition, books, accommodations on campus and more.
Until a couple of years ago, there were annual limits on RESP contributions, but now there is only a lifetime limit of $50,000. Technically, that means you can deposit $50,000 as soon as your child is born but you would miss out on the Canada Education Savings Grant (CESG). The CESG program pays 20% of your annual contributions into the RESP, up to a maximum of $500 per year. Families with income less than $41,544 get an additional 20% on the first $500 of contributions. Families with income between $41,544 and $83,088 get an additional 10%.
CCTB. Based on household income, the Canada Child Tax Benefit (CCTB) is a tax-free monthly payment from the federal government to eligible families, and is meant to help with the cost of raising children until they are 18.
Most families use that money as part of their budget in some way: for clothing, school supplies and food. However, there is another option. If the family receives the CCTB payment by direct deposit, they can deposit it directly into an account in their child¹s name to avoid paying tax on any earnings. Unfortunately, if parents deposit the CCTB into their own account first and then transfer it to their child¹s account, it is still considered the parent¹s income and any money it earns is taxable.
The payments could accumulate for 18 years in the child’s CCTB account, and the child would only have to pay tax on the earned interest when he or she begins filing a tax return— as long as the interest earned is less than the basic personal amount, which is $11,038 in 2013.
If the child has a part-time job and is filing a tax return, he or she needs to include the interest earned from the CCTB on the return. If the child is not earning any income, and the interest earned in the account is less than the basic personal amount, a tax return does not have to be completed. However, in the event that the interest earned is above the basic personal amount, the child would have to file a return.
Now that we have covered the kid-specific vehicles, what if you want to invest more broadly in your child’s name to help them build a nest egg (and save you taxes)? If you’ve used up your RESP (and RRSP for yourself!) contributions, then it’s time to look at other options.
Stocks & Bonds. Canada Savings Bonds (CSBs) and Stocks popular options for parents to invest on behalf of their kids. But it’s important to understand who pays tax on any earnings. The general rule for investments is that if a parent gives a child money to invest or puts money into an investment in the child’s name, any interest or dividends are taxed in the hands of the parents, while the capital (and associated gains and losses) will be considered the child’s.
With stocks, capital gains and losses will be taxed in the hands of the child. However, minor children may not request stock transactions, like buying or selling new stocks. If brokers are willing to open up a brokerage account for minors, any capital gains or losses generated can be claimed by the child.
When you’re trying to decide how to invest for your kids, ensure you understand who will be hit by the tax implications of each option, in order to choose the best fit for your family.
