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Taxes Ten tax tips for funding your child’s education

In the Chinese village of Pili, each school term requires its children to make a heroic 200-kilometre trek to their school via walking paths just a few inches wide, above rock faces and cliffs, through four freezing rivers and across a 200-metre chain bridge and four single-plank bridges. Over two days. It takes some careful planning to get these kids to school.

What about your own children or grandchildren? They may not face cliffs and frozen rivers, but there’s no doubt that paying for a postsecondary education can be a tough journey and requires planning. Today, I want to share a 10-point plan to help.

1. Research scholarships and bursaries. Who doesn’t like free money? Scholarships and bursaries can come from many different places. Your employer may offer them to the children of employees, and many schools have help available as well. There are also private funds (check out scholarshipscanada.com). Start your research a year before you hope to receiving funding for your child.

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2. Look into financial aid guidelines. Your child may find financial support for school through government grants and loans. Go to the website canada.ca and type “student aid” into the search field. You can apply online. Your province also offers grants or loans, and the website above has links to those as well.

3. Use funds from a TFSA if you must. Stealing money from your own retirement savings is rarely a good idea – even to pay for your child’s education. Why? Because making ends meet in retirement isn’t easy and should be a priority. But taking money from your TFSA, if you must, could make sense because it’s not a taxable event and you can recontribute those funds in the future.

4. Speak to your child about contributing. Having your child contribute to the cost of their education can teach them financial responsibility. Start, perhaps, by asking them to cover some portion of their tuition costs while you help with the rest. A student can generally work as many as 15 hours a week during school before it starts to affect their studying and grades. And of course working in the summer helps, too.

5. Open an RESP account. Saving over a number of years to pay for your child’s education can help a lot. And the place to start is a registered education savings plan (RESP), because the government will kick in 20 per cent of the contributions you make to the plan, up to $500 a year. Check out my article from last week on how to use an RESP optimally.

6. Ask grandparents to help. When you consider that the cost of a four-year postsecondary education can approach $80,000 when a child lives away from home, getting help from grandparents, if they’re able, can make things easier. A grandparent can set up an RESP for several grandchildren (a family plan) as one way to help.

7. Consider life insurance. If you’re a key breadwinner, what would be the financial impact to your family if you were gone tomorrow? Buying life insurance to ensure that education costs will be covered can be a huge help. Furthermore, consider insuring the life of your child. It’s generally cheap. And if you buy a permanent (not term) policy, you can build up tax-sheltered investments inside the policy that can be used to help pay for school later. Finally, you can transfer ownership of that policy to your child later on a tax-free basis once they’re 18 or older.

8. Invest in your child’s talent. Spending money on your child’s extracurricular activities (such as sports, music, dance) not only enriches the life of your child but may help them get into their school of choice later – and may even lead to scholarship opportunities (although the value of scholarships in Canada pales in comparison with those in the United States).

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9. Research postsecondary costs. While you can do some general research on the costs of education (do a search online using the phrase “cost of education Canada”), check out the calculators on the websites of any school your child may consider. You’ll find good information that can help quantify the costs for the specific school.

10. Document the plan. Long before your child heads off to college or university, document how much of the costs will be paid for using the five key ways to pay for education (see the first five ideas in this article): Begging (getting free money), borrowing (student and other loans), stealing (taking from your other assets), sweating (having your child work) and saving (RESPs and other savings).

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.

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