RESPs are already the best way to save for a child’s education. In most instances, a RESP beats out other alternatives - it is better than a RRSP, it will be better than the TFSA and it is certainly better than saving in a taxable account. Bill C-253 introduced by MP Dan McTeague proposes to change the RESP by allowing taxpayers a deduction of $5,000 on their taxes but the bill is very vague in its current form. It is not clear if the tax deduction will take the place of the CESG. No details are available on whether contributions will now be taxed in the hands of the student. Which in turn, raises the question on how contributions already made to the RESP will be treated.
I do have serious doubts on whether the RESP will ever be changed such that a tax deduction will be allowed on contributions, while keeping the existing grants and rules. Not surprisingly, the Conservative government takes the view that the bill is “irresponsible” and “ridiculous” and an “abuse” of the process and included a new clause aiming to quash the bill as part of its budget motion that will be voted on today. The Liberals, the only other party with any hope of forming a government, have indicated how serious they are about Bill C-253 by planning to let the budget motion pass. But more tellingly, Don Martin wrote in the National Post yesterday that according to Liberal insiders, their campaign platform will feature a “scaled-down version of MP Dan McTeague’s registered education savings scheme”. Why scale it down? Let me guess: it’s too good to be true. And politicians wonder why they get no respect.
Bookmark: del.icio.us Digg StumbleUpon
9 responses so far ↓
1 Al R // Mar 13, 2008 at 8:20 am
As you note, RESPs are already the best way to save for a child’s education (because of the already generous Canada Education Savings Grant), so why the need to provide a *very* expensive incentive to get people to save for their children’s post-secondary education? Especially since the people who use RESPs usually middle to upper-income earners who would send their kids to university anyway?
If the money is to be spent on post-secondary education, then it would be much better, as a public policy tool, to funnel it into the Canada Student Loans Program or the Canada Learning Bond because they demonstrably increase the percentage of kids from low-income families that go on to higher education.
2 Canadian Capitalist // Mar 13, 2008 at 8:44 am
Al: Despite the fact that if implemented, Bill C-253 will be more profitable to us than the CESG, I hold the same opinion that more funding for education can be funneled directly to students in the form of grants, bursaries, need-based scholarships, low-interest loans etc. Even if tax deduction is allowed for RESPs, it will probably end up like RRSPs - some people will save diligently but most will not. How does that leave us better than where we are now?
3 Traciatim // Mar 13, 2008 at 8:50 am
I agree with Al R, this to me looks far more like a political move that’s confusing the masses in to thinking the government (no matter the party) is looking out for them.
I don’t vote normally since the government will do whatever it wants anyway. I don’t complain much about what the governments doing, but the way the liberals abstained and then introduced a private spending bill is just ‘cheap’. It’s just like walking up to an old lady to help her cross the street and sucker punching her and taking her purse.
Education is a big problem, and the better education your population the better off everyone will be. This benefit (unlike the TFSA) will be very skewed to benefit the people that need it the least. People are already getting their 20% match making this one of the best ways to save for school. We don’t really fully understand the tax drawbacks on withdrawal if the whole amount is going to be taxed in the students hands rather than just the earnings. This should wait until a budget or if the Liberals wanted it that bad they should have voted down the existing budget and done things the honourable way. I guess that’s just too much to ask for politicians.
4 Traciatim // Mar 13, 2008 at 8:52 am
I like the idea of making the interest in student loans equal to the overnight lending rate if you are employed in Canada, and Prime+2.5 (it’s current rate, or Prime+5 fixed) if you are not, thus keeping a few more students working in Canada.
5 Four Pillars // Mar 13, 2008 at 8:57 am
Ditto the previous comments. The resp program was originally intended to help low to middle income families and in practice this hasn’t happened since it’s mostly middle to high income families that get the grants.
This kind of change will make an already way too complicated system even more complicated. I for one, would have no problem if they scrapped the whole thing and just put the money into grants, low cost student loan etc.
Mike
6 Al // Mar 13, 2008 at 9:40 am
Personally I’m a middle income earner with young kids, so I’d like to have the tax break (if the details work out) along with the CESG. But that’s just motivated self interest talking.
Putting money into grants and cheap loans does make more sense given the big picture, with the CESG being adequate encouragement for me to save for the kids. And of course, my offspring are going to be mowing lawns, pumping gas or whatever they need to do to make things work.
7 Al R // Mar 13, 2008 at 9:56 am
Even though this is a personal finance blog, the really interesting thing about post-secondary participation is that non-financial barriers appear to be more significant than financial ones. Some of the research suggests that a university (or college) education is not something that most young people choose, but, in the words of the Canadian Millennium Scholarship Foundation, “something they have been socialized to desire from birth.” This was certainly true in my case.
One of the theories behind RESPs (and the Canada Learning Bond) is that if an education account is there for young people and growing over the course of their elementary and high-school days, they will be more likely to think about and aspire to some form of post-secondary education. It remains to be seen how effective the program will be for low-income students who receive the Canada Learning Bond, but hopefully it is successful. We’re all hurt by wasted potential.
8 Traciatim // Mar 13, 2008 at 9:59 am
Al, I’m with you on that one. I’m a pretty median family, I make a descent salary to live on, my spouse makes less but doesn’t want to stay home. We have two young kids. I save to an RRSP, 2 RESPs, and soon to a TFSA . . . it would benefit a great deal as well. I just don’t think it’s the ‘greatest good’, like you point out.
Take for example a good friend of my spouse who I just helped with their taxes. She is a single mom with 2 kids. With her personal exemption, eligible dependant exemption, child credit, and employment credit she actually pays 0.00 for income tax. She works hard, put her self through school with help from training programs (worked while in school), she gets childcare assistance, now has a descent job (thanks to the education that was partially paid for by our tax dollars).
She is living proof, and inspiration, that Canada works. How is this RESP plan going to help her? It will do nothing, zilch, nada.
Making 150 grand a year? You’ll get a 40% bonus on your RESP from this plan . . . you can tell how great this thing is.
9 Aleks // Mar 13, 2008 at 3:12 pm
I don’t understand anything about the new RESP proposal. I don’t know whether it would be better for parents and students than the current system or whether it will have any effect on post-secondary enrollment.
But mostly, I have no idea what the heck the Liberals were thinking when they proposed it. Surely they knew the Conservatives would move to block it. They managed to sneak it through, which meant the Conservatives would be forced to deal with it in the budget, which means they either have to let it die or force an election.
The Liberals have shown no interest in an election any time soon, and regardless there have been much better issues to take a stand over. Minor amendments to tax law really don’t resonate with voters. So, if it wasn’t meant as a ploy to force an election, what was the point? The Conservatives remain in power and the Liberals come out looking like idiots. Surely they foresaw all of this playing out before the bill was even proposed.
Leave a Comment