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Debt-free and expecting a tax refund? Think of the grandkids

If you’ve maxed out your RRSPs and carry little debt, your grandchildren might appreciate some help with their education.


Higher income earners expecting a tax refund this year might want to choose some investment options that may help not only them, but perhaps their children and grandchildren, too.

The average tax refund for Canadians in the 2012 tax year equalled $1,620, according to the Canada Revenue Agency. It may not sound like a windfall, but it could be a great start to helping the next generation save for his or her higher education.

Canada's registered education savings plan (RESP) is a tax-sheltered investment vehicle used mostly by parents to save for their children's postsecondary education. But investment and tax experts alike say that grandparents should look at this as an option – as about 58 per cent of the country's high-income earners (more than $150,000 a year) are between 45 and 64 years old, according to Statistics Canada.

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Sandra Abley's clients – often high-net-worth earners in their 50s and 60s – have usually maxed out their registered retirement saving plans (RRSPs), paid off their mortgages, and have little or no other debt. The senior manager of high-net-worth planning at TD Wealth, based in Vancouver, says RESPs are a great option for older generations, but there are some tricks to ensure you can get the most out of your investment, hassle free.

"I actually don't like the grandparents opening RESPs in their own name for their grandchildren because if they pass away, there are a whole bunch of estate implications," Ms. Abley says. "So I like the grandparents to open it in their adult children's name for the grandchildren."

Before 2007, there were several restrictions on the use of RESPs that made them a much less appealing investment option, such as a $4,000 yearly contribution limit. But that has been removed (though there is a lifetime contribution limit of $50,000). And an added incentive is the Canada Education Savings Grant, which is money the federal government will add to the RESP, including 20 per cent on every dollar of the first $2,500 saved each year, up to $7,200. The recipient is eligible for these grants until he or she turns 17.

That money can be used for purchases outside of tuition, as long as the recipient is in school, Ms. Abley explains. This can include housing, transportation and supplies.

"The crazy thing about RESPs is there is no mandatory requirement to show a financial institution receipt. So once the kids are actually in postsecondary school, registered, paying full-time tuition … the child can use the RESP money to buy a house, to buy a car," she says. To take out money from an RESP, the beneficiary must show proof of enrolment, but after that, "there's no rule that says it all has to go to tuition."

But Ms. Abley is quick to add that, while there are exceptions to what can be purchased with money from an RESP account, these should be heavily researched to avoid extra taxes and other financial implications.

Education is not the only area to examine for refund possibilities. One option is the registered disability savings plan, or RDSP, says Edmonton-based Deanna Muise, tax partner at Kingston Ross Pasnak LLP.

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The RDSP was introduced in the 2007 federal budget as a financial vehicle to help save for a disabled person's long-term financial security and it also comes with a government money-match to help encourage its use. RDSP grants and bonds can equal up to $3,500 a year, depending on family income and contribution amount. Of course, this applies only to a smaller percentage of the population, Ms. Muise says. But, for this reason, it is often overlooked.

There are many options for what to do with a tax refund, but Clay Gillespie, managing director at Rogers Group Financial Advisors Ltd. in Vancouver, says people who are seeing dollar signs at tax time should have a look at what they're doing wrong.

"The first thing that I would have people do if they got a big tax refund is figure out why, because you'd rather not get one," he says. "Most people think tax refunds are good things. It's better than owing, don't get me wrong, but it's not a good thing to have because that means you just lent a bunch of money to the government for the year."

But if the money is already refunded, Mr. Gillespie has some suggestions: Take care of any high-interest debt first – no matter how small.

"I would lean towards credit-card debt, RRSPs, paying off other debt, then down to tax free savings accounts if I was putting this into a hierarchy."

No matter what the tax bracket or refund situation, people should avoid the trap of counting on any kind of tax refund as a guarantee and spending it before it arrives, as they may be reassessed, their income may fluctuate, or they may simply have miscalculated.

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If your inclination is to say, "Look at that, it's free money, I'm going to take a vacation," you could get into financial trouble, Mr. Gillespie says.

"You should plan your vacation ahead of time and put it into your budget to make sure you can afford it."

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