What else you can use in Canada to save for your child if you have already maxed out your Registered Education Savings Plan (RESP)

So I always put in $2500 a year for Little Bun’s RESP to get the maximum 20% match from the government and the province.

I don’t put in more than $2500 because at the rate things are going, it will hit a lifetime maximum for grant money by the time he is around 14, and the maximum saved can only be $50,000.

In the meantime, I have excess cash from the government for him that I am saving aside in a high-interest savings account, and it got me thinking:

Why don’t I invest for him?

And just have him take over the investments when he is older?

So I started looking into how I could do this, and none of these options are really NOT all that appealing to be honest with you.

I am disappointed that if we are conscientious parents who want to teach our kids how to save, help them etc, we don’t really have any true way to do this without it ultimately getting taxed at the time of transfer to them.

But #FirstWorldProblems means #FirstWorldSolutions…

INFORMAL TRUST / CUSTODIAL TRUSTS

You can set up an informal or custodial trust, and basically invest money in there in their names.

There seems to be quite a bit of nonsense in taxation and legal matters with an informal trust, namely that if you name a beneficiary for it like Little Bun, but then he turns out to be a degenerate and you want to rescind the money set aside for him, you can’t.

Any amount he gets from the trust, will be taxed for any capital gains at the time of transfer

So for instance, if you invested $100, and by the time he got it, it was $5000, he’d be taxed 25% on the capital gains of $4900, even if he doesn’t sell anything from the portfolio.

The taxes are applied to him upon transferring the investments to him.

• See: Attribution rules of a gift

Of course, I could just save money aside for him, invest it, and just transfer over parcels of it bit by bit so that he doesn’t get slammed with taxes all at once.

Or, transfer investments that are still at book value but then what’s the point?

I was hoping to capitalize on the decade-long compounding interest for him.

Québec doesn’t allow any beneficiaries except for the RESP

Lastly, in Quebec I cannot name a beneficiary for an account EXCEPT for the Registered Education Savings Plan (RESP).

All of that?

Has to be detailed in a will, even beneficiaries or successor holders on my Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA).

So there goes that as well… it might as well be my money, invested.

BEST OPTION SEEMS TO BE A SAVINGS ACCOUNT UNTIL THEY START WORKING*

Once they start working, they will have an earned income, and with this earned income, they will get RRSP contribution room up to 18%.

I could also simply just give him the money from his account I set aside for him, and he maxes out his RRSPs every year, even though he has to pay capital gains tax, maybe the RRSP contribution room or the amount I gift him (under $12,000) is basically $0 taxes anyway.

Once he hits 18, I give him the rest (?) of the money and he can max out his TFSA every year because that one has an age limit but not the RRSP.

*So, when can they start working? ASAP!

There’s no minimum age for an RRSP account; with the exception of brokerage accounts, a minor can set up an RRSP with a letter of consent from a parent or legal guardian, who retains signing authority until the child or teen turns 18 years old.

In order to make contributions to an RRSP account, a minor needs to have earned income the previous year and filed an income tax return with Canada Revenue Agency. 

[…]

“If you’re only earning $12,000 a year you will have contribution room, but you won’t pay any tax anyway,” he says. “So there’s no point in claiming that tax deduction today.”

• Source: Never too young – Globe & Mail

I’d rather he get the money externally and not from me or my company

He is a little young now, but I will see how he can pick up a side job or hustle as he is older, like newspaper routes, picking up cans and depositing them for money, or doing small chores, and then claiming it as self-employed income.

I will be looking out for jobs he can do that will earn him actual income he can start to claim and do his taxes with.

He will be learning how to fill out a tax form just like an adult – he would love this

He could then save those RRSP tax deductions (obviously we will be doing taxes on paper until he learns how it works and then he can do them with our software together), for future income years when he makes more than $12,000 or whatever the minimum is, and apply it then. He will just keep carrying forward the RRSP deduction credits to lower his taxes.

He could tap his RRSP for a home plan in the future

His RRSP could also be tapped for a future home buyer’s plan for his first place up to $35,000 as of 2019 rules, and the only thing is he cannot touch the money he has saved (and he shouldn’t have to anyway)…

He can also technically withdraw money from his RRSP if truly needed

He pays a 10% tax if he does that, but that withholding tax credit goes towards his taxes for that year so …. honestly, if he doesn’t have much income in that year, it won’t be that much of a penalty.

Of course this is not what I want him to do, nor an ideal situation but it IS something that can be done which isn’t so bad.

I want him to set up good money habits NOW

This is the most precious gift I can give him – knowledge coupled with time. I wish someone had done this with me even when I was 16! Not 6!!! … To learn how to save, max out things, I am very good at following rules when they make sense, and this makes so much sense.

I basically want him to get into the habit of maxing his RRSP, TFSA and having savings on the side before he does whatever he wants with his money.

This is the perfect time when they’re young to teach them to save 50% of their income and to learn to live on less, especially if it is possible and he doesn’t really need money as it is 100% disposable for him at this stage.

What is considered Earned Income for an RRSP?

• Salary and taxable benefits
• Self-employed business income and active partnership income
• Rental and royalty income
• Taxable child support and spouse support payments
• Income from supplementary unemployment insurance benefit plans
• Research grants
• CPP & QPP disability payments
• Employee profit sharing plan allocations

Out of all that, for a child under 18, the first two would be applicable for a child.

He could be self-employed like I was, as a sole-proprietor starting a business or just earning an income from side hustles, and when he is older, get a job at a retail or fast food chain, and earn a salary with taxable benefits.

So this is the plan:

1. Get him some earned income – self employed, maybe as a contractor to my company because I won’t hire him with a salary but I will pay him to do things I don’t want to do like scan my receipts, shred papers, etc OR hire him personally
2. Get him an 18% RRSP contribution room – I will have to see how much would be FAIR to pay someone I am hiring considering his age has to also make sense, but FYI — 18% of $12,000 is $2160/year
3. Open a Custodial RRSP where I am in charge and he takes over when he is 18 – that way I am in control at the start but he can log in and do the investing himself as he gets older
4. Have him learn how to invest that money – As he will likely be 6 by the time we start this, or a bit older, it will just be savings and meticulous records of what he does to earn that money for my company that makes sense for his age. As he gets older, he can take over bookkeeping as well which I also don’t enjoy (haha).

I obviously will be giving him money books, doing taxes WITH HIM on paper once he has an earned income (around age 6 or 7) and see how it goes.

Thoughts? This seems like uncharted territory.