Every parent has big dreams for their child’s future.
They want them to be happy, financially secure, get a great education, buy their dream home and pursue their dreams.
However, parents’ options are severely limited in Canada when it comes to investing or saving for their child’s future.
There are primarily only four options available to parents when saving for their child’s future and investing for minors in Canada.
Option #1 RESP
The very first and most well-known option is the RESP which stands for registered education savings plan.
The RESP has been marketed by banks and groups them as the only option for parents since 1998.
Now, you may be thinking to yourself, “How does the RESP work and what does it do?”
An RESP is a government program with government rules on where your child can go to school, what they can study and how the money YOU saved can be used.
Yes – you do receive a matching government grant of 20% of whatever you deposited. However, the grants are not unlimited.
The maximum RESP grant you will get each year is only $500 if you deposit $2500.
If you deposit $2000, then you’ll get $400.
The total RESP grants you’ll get by the time your child is 17 would be $7,200 if you deposited $36,000.
Any extra amount is all up to what you can get from the stock market.
What Does Your Child Have To Do To Use Their RESP?
They have to select a school or program that was approved by the government of Canada when they turn 18.
To see if your child will qualify to use the RESP grants in the account, you have to look up the school in the RESP designated institution list on the government site.
If the school isn’t there, then your child can’t use the RESP.
Today your child is 1.
Do you know what they will want to study 18 years from now or what education will look like?
If your child chooses a different path, then you have to close the RESP account when they are 21 or older and return the RESP grants the government gave you, even if your advisor lost it on the stock market.
Yes – you can take all your initial deposit tax-free when you close the RESP plan. However, if there was any growth in the account, you will be required to pay taxes on the growth at your income tax rate, plus another 20% penalty because the RESP account will not be used.
Option #2: Investment Account or Bank Account
This type of account is called an informal trust account.
Your child can’t own an investment account or bank account until they are 18.
You can open an account in their name, but you will have control and pay any taxes on gains.
Once your child turns 18, they will be allowed to take over full control of the account and withdraw funds you saved.
You have no authority to prevent them from accessing the account, no matter how much money is in it.
Option 3: TFSA- Tax Free Savings Account.
TFSAs are a government-controlled account. Children under 18 are unable to open a TFSA, and you can’t transfer your TFSA to your child even when they are 18 or older.
Option 4: Shares In Your Company or Business
Children under 18 can’t own shares in any company as they are not legally able to sign contracts.
You won’t be able to put any shares of your business in your child’s name until they are over 18.
Now, if you choose to transfer shares to your child when they are 18 you will need to do a fair market value evaluation and pay any capital gains taxes on the shares transferred.
Wait… There’s another option…
Option #5: Participating Whole Life Insurance Plan – Child Plan
Parents can open a participating whole life insurance plan for their children as early as 14 days old.
The plan will receive a tax-free annual dividend for life, and the cash values in the plan will grow tax-free during your child’s entire life!
This plan can be opened by either the parents or grandparents.
Parents have full control over when to transfer the participating whole life insurance plan to their children anytime after they turn 18.
If the parents feel like their child is unable to properly manage the cash value in the plan, they can wait until they feel their child will be responsible with the money, even if that means not until their child has their own family. The child has no authority at 18 to withdraw any of the cash value in the plan.
Participating whole life insurance plans have one major added benefit to parents.
If and when they transfer the plan they can make one small change which will allow them total control over the cash value of the plan – even after they transfer it tax free to their child.
Information is power, education is empowerment.