There are several ways to fund a child’s post secondary education; one might be to anticipate a child will receive scholarships or use student loans; ‘pay as you go’ although budgeting your cash flow will be more difficult; or start a savings plan now to prepare for the inevitable future expense. The following article will focus on one of these savings plan strategies; a Registered Education Savings Plan (RESP).

Background
An RESP is a tax deferral plan designed to help save for a student’s post-secondary education. It was created as a way for Canadians to save for education without the growth being taxed under the regular attribution rules. Normally, when you give your minor child money, interest or dividends earned on this money is taxed as if you had received the income i.e. it is attributed back to the parent and taxed in their hands. Please note: capital gain income does not attribute back to the parents.

Previously the rules governing an RESP were onerous. If your child did not attend a qualifying institution (i.e. college or university), all of the growth, interest, dividends and capital gains went to the educational institution that you designated on your RESP contract. The good news is that the Canada Customs and Revenue Agency (CRA) has significantly enhanced the RESP rules. In addition to the tax advantages, there are increased savings limits, additional termination options and the Canada Education Savings Grant (CESG).

Rules
Although contributions to an RESP are not tax deductible, all of the income in the plan compounds on a tax deferred basis. Further more, when the accumulated income is withdrawn from the plan to pay for education expenses, the student pays the taxes not the contributor. In most cases, this income would attract little tax because the student’s basic personal exemption and tuition and education credits will offset this tax liability.

Any individual can set up an RESP. This includes grandparents, aunts, uncles, godparents and friends (does not include trust or corporations).

The contributions may be made for up to 21 years, to a lifetime maximum of $50,000 per beneficiary with no annual maximum contribution. If these limits are exceeded, a one per cent per month penalty tax is charged until the over-contributed amount is withdrawn from the plan.

If the child does not proceed with post secondary education, the contributions are returned to the contributor with no tax consequences and the CESG is returned to the government. The accumulated income that has not been paid out to the beneficiary can be returned to the contributor by either.

The fall of 2008 was a period of unprecedented volatility in world equity markets.  Investors in Canada and around the world saw significant change to their portfolio value, sometimes in a single day.  It goes without saying that September and October have been devastating for equity markets in Canada and around the world. A severe credit crisis, growing global economic concerns and an evaporation of investor confidence initiated and compounded a sell off in stocks we haven’t seen for some time.  Let me quickly highlight the main sources of weakness that have brought us to where we are today.

The Credit Crisis

We’ve known about the “credit crunch” for over a year now as the U.S. sub-prime mortgage market has wreaked havoc on Financials since 2007. However, this one component of the credit market has evolved and expanded into other areas leading to multi-billion dollar write offs and constrained liquidity. The effects became so widespread that investors witnessed the demise of market powerhouses such as Bear Stearns, Freddie Mac, Fannie Mae, AIG Group, and Lehman Brothers. Unfortunately the collapse of one firm had a domino effect on other firms, thus constraining capital further resulting in the unwillingness of many financial institutions to lend to each other.

Economic Concerns

Growing economic concerns have hit Canadian markets particularly hard as Energy and Materials stocks make up approximately 40% of the TSX Index. The perceived decline in demand from an economic slowdown has impacted commodity prices, thus sending stocks in the resource space dramatically lower. Even with the credit problems faced by the U.S., it’s growing debt levels and lower consumer spending, investors are still moving money into U.S. treasuries for safety, thus propping up the U.S. dollar and putting further downward pressure on commodity prices. Growing economic concerns and a stronger U.S. dollar have only hurt the Canadian market since the end of August.

Forced Selling

Fundamentals have meant little to investors during the recent sell-off. The market couldn’t care less about analyst recommendations, target prices or earnings estimates. What’s important to remember though, when fundamentals mean little, is that selling not only occurs because investors want to sell, but also because they have to sell. Hedge fund collapses and redemptions have had a material impact on stock prices. Such selling pays little attention to the price received and more attention to getting proceeds to pay out investors. For that reason the magnitude of price declines has been magnified and volatility has been exceptional.