Dale Jackson

Personal Finance Columnist, Payback Time

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A recent survey by the Canadian Scholarship Trust found 66 per cent of Canadian parents went into debt to pay for their children’s sports activities. The same survey found only 48 per cent contributed to a registered education savings plan.

With college and university expenses skyrocketing you don’t need to be a math whiz to figure out the futility of paying interest on a loan, compared with an expenditure that the federal government will match with a contribution of its own. You also don’t need to be a statistician to figure an investment in education has much better odds than your child making big bucks as an athlete.     

Here’s how an RESP works:

• Ottawa matches 20 per cent of your annual RESP contributions, up to $500 per beneficiary per year, to a lifetime maximum of $7,200. 
• Your contribution, and the government grant, can be invested while the child reaches their college or university years. Unlike registered retirement savings plans (RRSP), which might have decades to grow, an RESP has a much shorter growth period. An investment advisor can help find products suited for a short time horizon, such as target funds.
• Also, unlike an RRSP, RESP contributions cannot be deducted from taxable income. They can, however, grow tax free along with the grants. When they are withdrawn they are taxed in the hands of the student, who probably won’t earn enough to have to pay income tax.

If the child does not continue their education beyond high school:

• The funds can be transferred to a sibling if that sibling has contribution room in his or her RESP.
• If there is no room or sibling, the grant money must be returned to the government.
• You will also be fully taxed on any investment gains plus an additional 20 per cent.
• The money that you have put into the RESP is returned to you.

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI