Tuition in Canada -At least my Kid does not go to School in the States

I am back, in a less cranky mood than on Friday (as today is the last day of income tax season). Today will also be my last blog for a week or so, as I am off for some R&R later in the week. Over the next few weeks, I need to refine the focus and purpose of this blog. To date, I have been pleased with the response to the blog, but I know I cannot commit to being a four or five day a week blogger. I do know that I want to try and have more original pieces than comment pieces, so I have a direction, it just needs need refinement. Anyways, enough navel gazing. For those of you with kids in university, or more specifically, saving to send your children to university, read on; although you may want to keep an air sickness bag nearby when you read the numbers detailed below.

Tuition in Canada -At least my Kid does not go to School in the States

I cannot believe the university school year is already over and my kids are returning home. This year I officially became an empty nester as my daughter marched off to university joining my son who just finished his third year. While my wife and I had different feelings upon my daughter leaving – my wife was sad and I was ecstatic - sorry kids if you are reading this, but I can only listen to you tell me that I know nothing for so long - my wife and I were both in sync on our reaction to the combined tuition bill, total shock.

You see, my son had switched at the last moment from a general science program to the Ivey business program at Western. The combined cost for my son and daughter including rent and food was in excess of $50k. My RESP quickly looked a little light. 

For a child living in residence at most Ontario schools you are looking at around $16-18,000 a year for residence, food, books and tuition. Computers add an additional cost. As for Ivey, they even warn you of the estimated cost of $37,000 for academic and living expenses on their website.

So for a child who does two years of undergrad and an Ivey HBA (I won’t even tell you what my son’s ultimate university plans are), the cost is in the range of $110,000. For a four year undergrad only, the cost is around $70,000.

I am putting the numbers out here because; I have found many parents really do not grasp the cost of a university or college education in Canada (let alone the United States, where the undergraduate cost approaches $50,000 a year in many cases). I think because many parents paid minimal tuition and in many cases went to university in the city we grew up in, we don’t grasp the magnitude of today's tuition fees, even though the media publicizes it, accurately and often.

So how does one fund their children's post secondary education? Ignoring the small percentage of Canadians that have private incorporated businesses and make their children beneficiaries of a family trust and fund their education in whole or in part through dividends, there is no magical answer.

The first building block is utilizing your RESP. Under current rules, you can contribute a grant eligible $2,500 a year and the government will provide a grant of $500 for a total of $3,000 a year. The total lifetime contributions per child are $50,000 and the total lifetime grant is $7,200. Click here for an excellent discussion of RESPs by Mike Holman who wrote the book on RESPs.

Assume you have $2,500 per child available each year to fund their RESPs up to the $50,000 lifetime maximum contribution and the RESP receives the $7,200 maximum grant limit. If the RESP earns 5% a year, you could have upwards of $90,000 in each child’s RESP. This would go a long way towards covering most children’s university or college costs. However, the reality is that between covering day to day living costs, paying down mortgages, contributing to a TFSA or making RRSP payments, etc., many parents don’t have $2,500 per child to contribute, especially in the early years. But no matter what you can afford to contribute; the RESP should form the building block for funding your child’s education.

As parents, two alternative ways to provide the discipline to fund RESPs are: (1) use your monthly Universal Child Care Benefit cheques and/or (2) your tax refund or a portion of the refund.

With the huge wealth transfer taking place in Canada, some parents may receive an inheritance. In this situation you might consider opening a separate account with some of the money you inherited to supplement the RESP, or even open an account in your child’s name (There is no attribution if the child has capital gains in that account).

Where there is no potential inheritance and money is tight, attending university or college in your home town makes any undergraduate program at least somewhat affordable. To the extent you can send your child to another city, even for a year, I would suggest doing such. It is a tremendous opportunity assuming they partake in the university experience (that means activities other then just drinking).

Many parents, whether they have the money or not, feel their child should work to pay for some if not all of their university costs. Whether this is a necessity or your philosophy, this discussion should be held when your child starts high school so they are aware of your expectations and they can plan around those expectations.

Finally, there are various student loan programs to finance your child’s education; however, family income can sometimes disqualify the child.

As noted above, this blog contains no magical solutions. This blog is meant to try and make parents more cognizant of the true costs of university and college in Canada.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Confessions of a Tax Accountant-Week 7-Late T3 slips & T2202A slips

Those Straggler T3 slips

This week, a few clients for whom we had already filed income tax returns, received additional T3 slips in the mail.  The receipt of these forms will necessitate the preparation of T1 Adjustment requests in May to account for these missed slips. This is a huge waste of time and energy for our firm and for the Canada Revenue Agency to process these forms, and frustrates our clients to no end.

The receipt of these additional T3 forms raises two questions: the first is “why do clients not realize they have additional slips outstanding”, and the second is, “do they have too many accounts to start with"?

In regards to question one, we find the confusion typically relates to income trusts. If a client has one or two income trusts, it is not very hard to track which T3s are outstanding. But many of our clients have multiple income trust units and it becomes extremely difficult to track what has been received.

The major investment firms attempt to do their part in tracking T3 slips, as they typically include a listing of income trusts for which information is still outstanding. However, as this listing arrives with several pages of administrative papers, many clients do not even keep the list. Even when you have this list, the T3s seem to come in batches, so one T3 may have three income trusts reported, but not include four others. Then you receive another T3 and it includes only one income trust and finally you receive a final T3 that has the final three income trusts reported. In the end, it is very hard for clients, the client’s investment advisors and their accountants to track whether all the income trusts have been accounted for in the tax return. This problem thankfully, should subside next year as many income trusts have converted to corporations.

In respect to the second question, many clients just have too many accounts and deal with too many institutions and/or advisors. This leads to dysfunctional investing and portfolio management. This issue will be a topic for a future blog.

Cyberspace and T2202A tax slips

This week, much like every week prior, I had several clients provide their university/college-aged child’s income tax materials without their T2202A tuition form. In the “old days” this form was mailed, however, these days, the institutions do not mail the receipt, but rather place them on their website and thus the form must be accessed by the student. I would suggest the percentage of students who ever notice or pay attention to this comes in around 10%. Thus, without the parent or accountant requesting this information, it is forgotten and potentially missed as a credit.

The tuition information is important for two reasons. The first reason is that in most cases, the child can transfer up to $5,000 of the tuition, education amount and textbook amount to their parents or grandparents (federally) if these amounts are not required to reduce the child’s taxable income. The second reason is that excess balances of these credits that are not transferred or utilized can be carried forward by the student to be used once they become taxable (i.e. commence full-time employment).

So for example, assume a typical student who pays $6,000 in tuition and attends school for eight months full time. This student will have tuition credits of $9,720 ($6,000 tuition plus $3,720 ($400 +$65 a month x 8), for full time education and text book credits respectively. Assuming $5,000 of this credit is transferred to their parent or grandparent, the student has a tuition credit carryover of $4,720 ($9,720-$5,000). There are  also provincial credits, but they pretty much mirror the federal credit. It should be noted a student can make approximately $11,000 of employment income before the tuition credit is impacted.

Thus, after four years, the tuition credit carryforward  could approach $20,000. When your child files their first income tax return reporting full time employment income, they will potentially have a credit worth approximately $4,000 (being $20,000 tuition carryover times 15% federal credit plus 5.05% Ontario tax credit).

If your son or daughter is in a specialty business school or similar professional school and pays say $20,000 a year in tuition, the federal tuition credit carryover could potentially be $18,720 ($23,720 less $5,000). This size credit could potentially lead to a refund of almost $19,000 in their first year or two of full-time employment.

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.