Like a TFSA, a Registered Education Savings Plan (RESP) contribution is made with after-tax personal money.
The big carrot with a RESP is the Canada Education Savings Grant (CESG) the federal government contributes. For every $100 you contribute to an RESP, the government provides a $20 grant. The CESG can be as much as $500 a year for each child. You are allowed to backfill years in which you didn’t take full advantage of the grant, so you can get up to $1,000 in one year by contributing $5,000. But, let’s take a look at the difference between investing in RESPs, versus leaving the money inside your professional corporation.
If you are in the top tax bracket and you want to net $2,500 to deposit into a RESP, then the gross amount of income you would need to remove from your company is $4,665.
When you put $2,500 into an RESP the government gives you a 20 per cent gift in the form of the Canada Education Savings Grant, so your RESP deposits total $3,000.
If you start when your child is born and run it through to age 17 the estimated accumulated total in the RESP would be about $79,000, assuming a four per cent rate of return and contributions of $3,000 per year.
Let’s say you don’t take the $4,665 from your professional corporation and you leave it in to be taxed at 16 per cent. The net amount available to invest would be $3,919.
Assuming the same four per cent rate of return, the accumulated total at your child’s age 17 would be $103,070; if you then dividend this money to them when they’re going to school, they shouldn’t have to pay tax when they use the education and dividend tax credits.
In this case, the end result could be no tax to the child and more available money than when using a RESP.
Now before you start emailing me about the difference in taxes during the accumulation stage, consider this: there are ways to invest money in a professional corporation and not pay accrual tax.
One interesting investment that comes to mind is Class B Berkshire Hathaway shares. Who better to care for your children’s education money than Warren Buffet? Another way is to invest in companies that pay eligible dividends and you take part of your income as dividends.