{"id":3014,"date":"2023-02-15T20:03:15","date_gmt":"2023-02-15T20:03:15","guid":{"rendered":"https:\/\/advisor.wellington-altus.ca\/sweeneybride\/?p=3014"},"modified":"2023-07-14T17:58:12","modified_gmt":"2023-07-14T17:58:12","slug":"physicians-3-ways-to-maximize-education-funding-for-your-kids-and-save-taxes-while-you-do-it-2","status":"publish","type":"post","link":"https:\/\/advisor.wellington-altus.ca\/sweeneybride\/2023\/02\/15\/physicians-3-ways-to-maximize-education-funding-for-your-kids-and-save-taxes-while-you-do-it-2\/","title":{"rendered":"Physicians: 3 ways to maximize education funding for your kids (and save taxes while you do it)"},"content":{"rendered":"<p><span style=\"font-weight: 400\">Post-secondary education is expensive &#8211; especially if your kids want to become healthcare professionals themselves. According to the AMFC Graduation Questionnaire, over 40% of medical school graduates in Canada had debt exceeding $200,000!<\/span><a href=\"https:\/\/hemingwayapp.com\/#_edn1\"><span style=\"font-weight: 400\">[i]<\/span><\/a><span style=\"font-weight: 400\"> If you have more than one child to provide for, the total cost of education can be enormous. Thankfully, there are ways to ease the cost.<\/span><\/p>\n<p><span style=\"font-weight: 400\">We&#8217;ll look at three ways to ensure your children receive the education they desire:<\/span><\/p>\n<p><span style=\"font-weight: 400\">1) Registered Education Savings Plan<\/span><span style=\"font-weight: 400\"><br \/>\n<\/span><\/p>\n<p><span style=\"font-weight: 400\">2) Family trusts<\/span><\/p>\n<p><span style=\"font-weight: 400\">3) Using your professional corporation and holding company<\/span><\/p>\n<p>&nbsp;<\/p>\n<h1><span style=\"font-weight: 400\">Registered Education Savings Plans (RESPs)<\/span><\/h1>\n<p><span style=\"font-weight: 400\"><br \/>\n<\/span><span style=\"font-weight: 400\">RESPs should be the first strategy you consider. They are government-sponsored plans with huge benefits, including government grants, tax deferral, and income splitting.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">The RESP owner, known as the subscriber, contributes to the plan. The beneficiaries \u2013 usually your children \u2013receive the funds when they attend a qualified post-secondary educational program. Contributions are not tax-deductible, but investment growth and government grants are tax-deferred until withdrawn.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400\">Types of RESPs<\/span><\/h2>\n<h3><span style=\"font-weight: 400\"><br \/>\n<\/span><span style=\"font-weight: 400\">Self-directed RESPs<\/span><\/h3>\n<p><span style=\"font-weight: 400\">Self-directed RESPs are set up with a bank, your financial advisor, a robo-advisor, or a discount brokerage. You can own them individually or with a joint subscriber \u2013 for example, a spouse. You control deposits, withdrawals, and investment decisions.<\/span><\/p>\n<h4><i><span style=\"font-weight: 400\">There are two types of self-directed RESPs:<\/span><\/i><\/h4>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400\"><b>Individual Plans<\/b><span style=\"font-weight: 400\">: have a single beneficiary, and there are no restrictions on who can open one. You can add beneficiaries regardless of their age.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400\"><b>Family Plans<\/b><span style=\"font-weight: 400\">: can have multiple beneficiaries if they are related to the subscriber biologically, or by adoption (children, grandchildren, or siblings.) Beneficiaries must be under 21 years old when added to the plan. You can allocate withdrawals to each beneficiary separately, and they do not need to be equal. You can share government grants among the beneficiaries, subject to certain limits &#8211; more on that below.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<h3><span style=\"font-weight: 400\">Group RESPs<\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400\">These are like a pension. Along with other plan members, you will contribute to the plan according to a pre-determined schedule. The timing of the education benefits depends on your child&#8217;s birthday, and the amount they receive will depend on the amount you contribute, among other factors. The plan manager invests the assets, usually in low-risk investments like GICs and bonds. There can be high sales charges, penalties for missing contributions or changing your contribution schedule, and making early withdrawals. They are also less flexible when it comes time to withdraw funds. Avoid these plans in favour of a self-directed RESP.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400\">RESP Grants<\/span><\/h2>\n<p><span style=\"font-weight: 400\">The RESP&#8217;s most defining benefit is that the government will contribute grants to the plan on behalf of the beneficiaries And who doesn&#8217;t like money back from the government? <\/span><\/p>\n<p><span style=\"font-weight: 400\">There are several types of grants; however, the primary grant is the Canada Education Savings Grant or CESG.<\/span><\/p>\n<h3><span style=\"font-weight: 400\">Canada Education Savings Grant (CESG)<\/span><\/h3>\n<p><span style=\"font-weight: 400\">The Federal Government provides a 20% grant on your contributions, up to $500 per child per year. This means a $2,500 contribution each year will get you the maximum grant for that year ($2,500 x 20% = $500.)\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Grant room accumulates from the year your child is born, regardless of whether the RESP previously existed. If you miss a year, you can catch up on missed grants one year at a time. For example, if you open an RESP for your child when they are five years old, you can contribute $5,000 and receive $1,000 in CESGs ($500 for the current year and $500 for a previous year in which you received no grants).\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400\">Limits You Need to Know About<\/span><\/h3>\n<p><span style=\"font-weight: 400\">The maximum lifetime CESG is $7,200 per child, regardless of the number of RESP plans they have. A beneficiary cannot withdraw more than $7,200 in CESGs, even in a family plan.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Beneficiaries can usually receive grants until the year they turn 15. If you meet certain conditions, grants can be paid when they are 16 and 17 as well. You must meet one of the two following conditions:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">A minimum of $2,000 was contributed before the end of the year they turned 15<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">A minimum annual contribution of $100 was made in at least four of the years before the end of the year they turned 15<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">This means that you must start to save before they are 15 years old to be eligible for the CESGs.<\/span><\/p>\n<p><span style=\"font-weight: 400\">You can contribute up to $50,000 of your own money, per child, over their lifetime. You will be subject to a 1% monthly penalty if you over-contribute until you withdraw the excess.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Unlike an RRSP, you cannot carry contributions forward. For example, if you contribute the entire $50,000 on day one, they will receive only $500 in CESGs and be ineligible for any future CESGs.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">RESPs can remain open for up to 35 years.<\/span><\/p>\n<h3><span style=\"font-weight: 400\">The Additional CESG<\/span><\/h3>\n<p><span style=\"font-weight: 400\">An additional 10% or 20% is payable on the first $500 contributed to the RESP each year for families with income below a certain threshold. You can find those thresholds <\/span><a href=\"https:\/\/www.canada.ca\/en\/services\/benefits\/education\/education-savings\/savings-grant\/amount.html\"><span style=\"font-weight: 400\">here<\/span><\/a><span style=\"font-weight: 400\">.<\/span><\/p>\n<h3><span style=\"font-weight: 400\">Canada Learning Bond (CLB)<\/span><\/h3>\n<p><span style=\"font-weight: 400\"><br \/>\n<\/span><span style=\"font-weight: 400\">An income-tested grant that provides additional savings for families&#8217; children below certain income thresholds. You can find the thresholds <\/span><a href=\"https:\/\/www.canada.ca\/en\/employment-social-development\/services\/learning-bond\/eligibility.html\"><span style=\"font-weight: 400\">here<\/span><\/a><span style=\"font-weight: 400\">.<\/span><span style=\"font-weight: 400\">The CLB provides $500 the first year they are eligible and $100 each year they continue to qualify until they turn 15.<\/span><\/p>\n<h3><span style=\"font-weight: 400\">Provincial Grants<\/span><\/h3>\n<p><span style=\"font-weight: 400\">British Columbia and Quebec have more incentives for RESP subscribers:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><b>BC Training and Education Savings Grant (BCTESG)<\/b><span style=\"font-weight: 400\"> is a one-time $1,200 grant payable to any beneficiary between six and nine. No contributions are required to receive this grant.<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Quebec Education Savings Incentive (QESI)<\/b><span style=\"font-weight: 400\"> is an additional 10% grant payable on contributions, up to $250 per year. For families with incomes below a certain threshold, the grant increases by up to $50 annually.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">Besides grants, RESPs provide significant tax advantages.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">Tax Deferral<\/span><\/h2>\n<p><span style=\"font-weight: 400\">Self-directed RESPs can hold various investments, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. The plan&#8217;s investment income and growth are sheltered from tax until you withdraw the funds, ideally once the beneficiary goes to school. At this point, the earnings and grants are taxed in the beneficiary&#8217;s <\/span><span style=\"font-weight: 400\">hands,<\/span><span style=\"font-weight: 400\"> not your own. This is an effective way to split investment income with your children.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">Income Splitting<\/span><\/h2>\n<p><span style=\"font-weight: 400\">The investment income, growth, and grants are taxed in the beneficiaries&#8217; hands when you withdraw from the RESP. With proper tax planning and tuition tax credits, it is common for beneficiaries to pay zero tax on much &#8211; or all -\u2013 of this income.<\/span><\/p>\n<h1><span style=\"font-weight: 400\"><br \/>\n<\/span><span style=\"font-weight: 400\">Withdrawing from the RESP<\/span><\/h1>\n<p><span style=\"font-weight: 400\">There are two types of withdrawals available for funding education expenses. They are Education Assistant Payments (EAPs), made up of the accumulated grants and investment returns, and Post-Secondary Education withdrawals (PSE), consisting of the subscribers&#8217; after-tax contributions to the plan.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">EAPs are taxable to the beneficiary, while PSEs are tax-free.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Students must submit proof of enrollment to their RESP provider before making a withdrawal. When withdrawals are made, the subscribers can choose between EAPs and PSEs. When choosing EAP withdrawals, a pro-rated amount of grants and investment income is taxed in the beneficiary&#8217;s hands. <\/span><\/p>\n<p><span style=\"font-weight: 400\">For example, assume the plan has $5,000 of grants and $10,000 of investment growth. If you make a $4,500 EAP withdrawal, you would be withdrawing $1,500 of grants and $3,000 of growth. The full $4,500 would be included in the beneficiary&#8217;s income for that calendar year.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Since most students have low or no income in the first few years of school, it is usually best to withdraw EAPs first.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">By withdrawing all the grants and growth in the plan, you will be left only with your after-tax contributions. If the beneficiary completes school or changes paths, and funds are leftover, you can withdraw them tax-free and without penalty.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Withdrawals are not paid to the school directly &#8211; they are paid to either the subscriber or the beneficiary. Withdrawn amounts do not need to match tuition payments either &#8211; so long as you provide proof that the beneficiary is attending a qualified post-secondary program, withdrawals are allowed. For example, if a student received a full scholarship, you can make withdrawals to fund other expenses like room, board, transportation, etc.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Since RESPs can remain open for up to 35 years, there is often an opportunity to use funds from the RESP later in the beneficiaries&#8217; lives, even if they don&#8217;t go to university when first eligible.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400\">What Type of Education Qualifies for RESP Withdrawals?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">You can make RESP withdrawals if the student attends a Designated Educational Institution. A common misconception is that you must use the funds for a traditional college or uUniversity. However, the list of eligible financial institutions is vast, ranging from beauty and automotive training to medical and law schools. If the program is three weeks in length, and the student spends a minimum of 12 hours per month on the program, then an RESP withdrawal is allowed.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">I once had a client ask to withdraw funds to attend a two-week bartending course. The program was not on the list of approved schools, and the course did not meet the three-week minimum. But, after the two weeks of training, there was a one-week study break, followed by a final exam. We argued that including the extra study week meant the program met the three-week minimum, and we convinced CRA to allow the RESP withdrawal. <\/span><\/p>\n<h3><span style=\"font-weight: 400\">Withdrawal Limits<\/span><\/h3>\n<p><span style=\"font-weight: 400\">RESP withdrawals are very flexible, but there are some limits.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">EAP withdrawals made in the first 13 weeks of the program for full-time students are limited to $5,000. There are no limits on PSE withdrawals<\/span>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Full-time programs are those lasting three weeks or more, with a minimum of 10 hours of instruction or work per week<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">EAP withdrawals made in the first 13 weeks of the program for part-time students are limited to $2,500. there are no limits on PSE withdrawals<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Part-time programs are those lasting three weeks or more, with a minimum of 12 hours of instruction or work per month<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">EAP withdrawals over a certain amount are scrutinized and will require further explanation. The limit for 2022 is $25,268, and this amount is indexed annually. I have seen several withdrawals of this magnitude, and in each case, they were deemed reasonable, but they must be in some way related to education expenses. In one example, a parent purchased a car for their son living on campus. In another, they used part of the withdrawal to fund the purchase of a condo on-campus for the student to live in. Both were approved.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">There are no withdrawal limits for PSEs.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">You can make withdrawals for up to six months following the completion of an educational program.<\/span><\/li>\n<\/ul>\n<h3><span style=\"font-weight: 400\">What if My Child Does Not Attend a Qualifying Education Program?<\/span><\/h3>\n<p><span style=\"font-weight: 400\">What if your child becomes a famous rockstar or a successful entrepreneur and doesn&#8217;t attend post-secondary? In that case, you have a few options:<\/span><\/p>\n<ul>\n<li><b>Leave the RESP open<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">RESPs can remain open for up to 35 years. If they don&#8217;t go to school right away but change their mind later, you can still use the funds for education.\u00a0<\/span><\/p>\n<ul>\n<li><b>Change the beneficiaries<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">For individual plans, you can replace the beneficiary with anyone you like. Any prior contributions will count as new contributions for the replacement beneficiary, which could result in an overcontribution. The exception to this rule is siblings, where both beneficiaries are under 21 years old.<\/span><\/p>\n<ul>\n<li><b>Transfer to an RRSP<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">If certain conditions are met, you can transfer up to $50,000 of accumulated investment income (known as Accumulated Income Payments or AIPs) to your RRSP. You must have the RRSP room available, the plan must have existed for at least ten years, and all beneficiaries must be over 21. If you own the plan jointly, each subscriber can use this option. The AIPs will be added to your income, but you will receive an offsetting tax deduction. Any grants in the plan must be repaid to the government dollar-for-dollar.<\/span><\/p>\n<ul>\n<li><b>Transfer to a Registered Disability Savings Plan (RDSP)<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">If the beneficiary qualifies for the Disability Tax Credit, they can open an RDSP if they have not already. AIPs can be transferred to an RDSP up to the $ 200,000-lifetime RDSP contribution limit but will not attract the Canadian Disability Savings Grant.<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400\"><b>Withdraw your contributions<\/b><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400\">You can withdraw your contributions tax-free since you paid tax on this money when you earned it. You can withdraw the remaining investment income, but you will pay tax at your marginal rate, plus a 20% penalty tax. This additional tax compensates for the investment earnings attributable to the grants in the plan. If you choose this option, you will have to return all government grants. <\/span><\/p>\n<ul>\n<li><b>Donate the remaining income to a designated educational institution<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">If you have exhausted all the above options and there is investment income remaining in the plan, you can gift it to a school of your choice. You will not pay tax on the gift, and you will not receive a charitable donation tax credit.<\/span><\/p>\n<h1><span style=\"font-weight: 400\">Estate Planning Considerations<\/span><\/h1>\n<p><span style=\"font-weight: 400\"><br \/>\n<\/span><span style=\"font-weight: 400\">For jointly owned plans, when a subscriber dies, ownership of the plan passes outside of the deceased&#8217;s estate directly to the surviving owner. No tax is payable, and provincial probate fees do not apply.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Upon the death of the last subscriber, the RESP forms part of the deceased&#8217;s estate, so you should name a successor RESP holder in your will. If you do, no taxes are owed at this point, but the market value of the RESP will be subject to provincial probate fees. Without a named successor, your executor may need to collapse the plan with taxes owing and grants repaid to the government.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h1><span style=\"font-weight: 400\">RESP Strategies \u2013 How to Make the Most of Your RESP<\/span><\/h1>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400\">With generous grants and tax benefits, RESPs should always be the first option you consider for education savings. Here&#8217;s how to make the most of them:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Most people focus on maximizing the grants. While this is a commendable strategy, only $36,000 of contributions can attract grants ($7,200 lifetime grants divided by the 20% grant rate). That means $14,000 in available room can be used before bumping into the $50,000 lifetime contribution limit. Those that can afford to contribute this extra $14,000 should aim to do so as early as possible, maximizing the amount of time the funds are invested and increasing the overall investment growth in the plan. Consider depositing $16,500 in year one ($2,500 to get the maximum $500 grant, plus the additional $14,000 that will not attract grants.) Then, contribute $2,500 per year until the beneficiary is 13, and $1,000 in the year they turn 14. If you do this, you will hit both the $50,000 lifetime limit and the $7,200 grant limit.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If you have $50,000 on hand to contribute to the RESP right away, consider forgoing the grants and depositing the entire $50k. You will give up the grants, but maximize the amount and time that the money is invested.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Spread the $50,000 over the contribution period until they reach the contribution and grant limits. Spreading them out over time makes them more manageable.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If you can&#8217;t contribute an extra $14,.000 in year one, that&#8217;s okay &#8211; aim to contribute this amount over time, as early as possible.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If it looks like they won&#8217;t be attending post-secondary, consider slowing down on your RRSP contributions. That way, you will accumulate RRSP room for AIPs.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If your practice is incorporated, consider taking your compensation as salary instead of dividends, which will increase your RRSP room.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Where possible, own the RESP jointly with a spouse.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Ensure you name a successor RESP holder in your will.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h1><span style=\"font-weight: 400\">Using Family Trusts<\/span><\/h1>\n<p><span style=\"font-weight: 400\">Once you have optimized your RESP, it is time to look at other options.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Trusts are complicated, and this is not meant to be a detailed guide. Rather, you will learn about using family trusts to split income and save tax.<\/span><\/p>\n<p><span style=\"font-weight: 400\">With all complex tax decisions, seek the advice of your tax advisor or accountant first.<\/span><\/p>\n<h2><span style=\"font-weight: 400\"><br \/>\n<\/span><span style=\"font-weight: 400\">What is a Trust?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">A trust is a relationship where one party conveys property to another party for the benefit of a third party. Generally, a trust is created using a trust agreement or deed, and it should be examined or drafted by an experienced lawyer. There are costs to opening and maintaining a trust that you must consider to determine if a trust is right for you and your family.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">The primary benefits of using a trust include:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Control and protection of assets<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Avoidance of provincial probate fees on death<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Income splitting<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Transferring wealth to future generations<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">For a trust to be valid, there must be three certainties:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><b>Certainty of intention<\/b><span style=\"font-weight: 400\">: the intention to create a trust must be clearly described<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Certainty of subject<\/b><span style=\"font-weight: 400\">: a clear description of the property that is to be transferred to the trust<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Certainty of object<\/b><span style=\"font-weight: 400\">: the beneficiaries of the trust must be clearly defined<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">And three parties:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><b>Settlor<\/b><span style=\"font-weight: 400\">: the person or persons that transfer the initial property to the trust<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Trustee<\/b><span style=\"font-weight: 400\">: the person or persons to whom the property is transferred, to be managed for the beneficiaries<\/span><\/li>\n<li style=\"font-weight: 400\"><b>Beneficiary<\/b><span style=\"font-weight: 400\">: the person or persons who ultimately benefit from the trust property<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">All trusts fall into two categories:<\/span><\/p>\n<h3><span style=\"font-weight: 400\">Testamentary Trusts<\/span><\/h3>\n<p><span style=\"font-weight: 400\">Arises through a person&#8217;s estate. The terms of the trust are defined in the deceased&#8217;s will, and it only comes into existence upon death.<\/span><\/p>\n<h3><span style=\"font-weight: 400\">Inter Vivos Trusts<\/span><\/h3>\n<p><span style=\"font-weight: 400\">Any trust that is not a testamentary trust. is Aan inter vivos trust which is created during a person&#8217;s lifetime.<\/span><\/p>\n<p><span style=\"font-weight: 400\">We will discuss strategies for using inter vivos trusts, specifically a discretionary family trust.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">How Are Trusts Taxed?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">Trusts are separate taxpayers. Trusts must file annual tax returns and distribute tax slips to beneficiaries.<\/span><\/p>\n<p><span style=\"font-weight: 400\">When trust assets generate investment income (interest, dividends, capital gains, etc.), it is taxable to the trust. Trusts do not benefit from graduated tax rates or personal tax credits, and income retained by the trust is taxed at the highest marginal tax rate. It is best, where possible, to allocate the trust income to the beneficiaries instead. When done correctly, the income is taxed in the beneficiaries\u2019 hands.<\/span><\/p>\n<p><span style=\"font-weight: 400\">When paid to beneficiaries, income retains its character, so dividends are taxed as dividends, and interest is taxed as interest.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Income can be allocated to beneficiaries to pay for reasonable expenses. Amounts paid are reasonable when for the child&#8217;s benefit &#8211; i.e., for support, maintenance, care, education, and enjoyment and advancement of the child, including the child&#8217;s necessities of life.<\/span><\/p>\n<p><span style=\"font-weight: 400\">This can be a powerful income-splitting tool. However, you need to pay attention to a few rules for this to work effectively.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span style=\"font-weight: 400\">The Attribution Rules<\/span><\/h3>\n<p><span style=\"font-weight: 400\">The most pervasive tax rules are collectively known as the attribution rules. They ensure that taxes are attributed to the beneficial owner of the property. When attribution rules apply, the trust&#8217;s income is allocated back to the settlor, eliminating the income-splitting benefits. These rules primarily target paying income to spouses and minor children, but not adult children. See the table below for more on attribution scenarios.<\/span><\/p>\n<h3><span style=\"font-weight: 400\">Reversionary Trusts<\/span><\/h3>\n<p><span style=\"font-weight: 400\">The strictest attribution rule is the reversionary trust rule. Where a settlor has control over the distribution of the trust&#8217;s property, or the property could revert to the settlor, then all income of the trust is allocated back to the settlor, eliminating the tax benefits. The settlor should not be the sole trustee or a beneficiary, and if they are a trustee, they should be one of three. This way, as trustee, the settlor does not have a majority in decision-making regarding the trust&#8217;s property, and the reversionary trust rule may be avoided.<\/span><\/p>\n<h3><span style=\"font-weight: 400\">Transferring Property to a Trust<\/span><\/h3>\n<p><span style=\"font-weight: 400\">When you transfer assets to the trust, they are deemed to be disposed of, and any capital gains will be realized. This means taxes are payable the gain. It is best, where possible, to transfer cash to the trust instead.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span style=\"font-weight: 400\">The 21-Year Rule<\/span><\/h3>\n<p><span style=\"font-weight: 400\">Every 21 years, the trust is deemed to have disposed of its assets for tax purposes. This prevents you from deferring unrealized capital gains perpetually. The gains would usually be taxed in the trust&#8217;s hands, but with proper planning, the assets can be rolled out to the beneficiaries at cost, allowing the beneficiaries to take ownership of the assets without triggering the capital gains.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400\">Using a Prescribed Rate Loan<\/span><\/h2>\n<p><span style=\"font-weight: 400\">If property is gifted to a trust without consideration, the attribution rules apply. However, if property is instead loaned to the trust, attribution is avoided. The loan must be made at the prescribed interest rate, a rate set by CRA and updated quarterly. The interest rate for this loan is locked in for the life of the loan, so when rates are low, this strategy can be particularly effective. At the time of writing, the prescribed loan rate is 1% but will increase to 2% on July 1st, 2022.<\/span><a href=\"https:\/\/hemingwayapp.com\/#_edn2\"><span style=\"font-weight: 400\">[ii]<\/span><\/a><\/p>\n<p><span style=\"font-weight: 400\">When using this strategy, there are several considerations:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">The trust must pay interest to the settlor before January 30th of the following calendar year. Failure to do so results in attribution of the trust&#8217;s income to the settlor in the current year and all future years<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">The interest income is taxable to the settlor, and deductible to the trust<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">For this strategy to work, the investment returns generated by the trust must be higher than the interest rate on the loan<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400\">Informal Trusts, AKA &#8220;In-Trust For&#8221; or &#8220;ITF&#8221; Accounts<\/span><\/h2>\n<p><span style=\"font-weight: 400\">Many financial institutions offer ITF accounts to their clients, opened on behalf of a minor child beneficiary. These simplified trust accounts are created using an account application form and not a trust deed, meaning the services of a lawyer are not needed. Without formal supporting documents, these accounts may lack critical information surrounding the three certainties required to meet the definition of a trust. The account owner (the trustee) is often the contributor (the settlor) of the trust. In these cases, the reversionary trust rules may apply.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Without a formal trust deed, there are no instructions for distributing the assets once the child reaches the age of majority. Once they turn 18 (19 in some provinces), the money is legally theirs to do with as they please. Many young adults are not financially mature enough to handle a windfall at that age \u2013 I know I certainly wasn&#8217;t.<\/span><\/p>\n<p><span style=\"font-weight: 400\">ITF accounts are subject to the same attribution rules described above. And like all trusts, annual tax and information filings are required; however, this is rarely communicated to clients when opening ITF accounts.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">There are estate planning concerns here too. If the trustee dies and a successor hasn&#8217;t been named in their will, the estate becomes the trustee until the beneficiary attains the age of majority. The trust&#8217;s settlor may not have chosen the executor of the trustee&#8217;s estate, leading to potential conflicts.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">If the beneficiary passes away, the intestacy laws kick in, meaning the funds will be distributed to the child&#8217;s parents to do as they please. If the contributor was not a parent, they will have lost control of how those assets are used.<\/span><\/p>\n<p><span style=\"font-weight: 400\">If opening an ITF account, ensure you have adequate documentation, are prepared to file returns each year, and are okay with your child receiving the full value at the age of maturity. You should also make provisions in your will for the account, naming a successor trustee.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<h1><span style=\"font-weight: 400\">Strategies for Using Trusts<\/span><\/h1>\n<p><span style=\"font-weight: 400\">Let&#8217;s look at a simplified example.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Drs. Jane and Bob Smith live in BC and have two children: Alice, age 16 and Trevor, age 20<\/span><\/p>\n<p><span style=\"font-weight: 400\">They pay top marginal taxes of 53.5% in BC<\/span><\/p>\n<p><span style=\"font-weight: 400\">Alice is attending a private school at $10,000 per year<\/span><\/p>\n<p><span style=\"font-weight: 400\">Trevor is attending University at $20,000 per year<\/span><\/p>\n<p><span style=\"font-weight: 400\">Jane has recently sold an investment property and has $500,000 after-tax that she wishes to use in part to pay for education expenses for their children. <\/span><span style=\"font-weight: 400\">Their expected portfolio return is 5% annually, comprised of 3% interest ($15,000) and 2% capital gains ($10,000)<\/span><\/p>\n<p><span style=\"font-weight: 400\">They also have a family RESP with both Alice and Trevor as beneficiaries<\/span><\/p>\n<h4><i><span style=\"font-weight: 400\">Example 1 &#8211; Jane invests the funds personally and does not use a trust<\/span><\/i><i><\/i><\/h4>\n<p><span style=\"font-weight: 400\">The interest is fully taxed, as are half of the capital gains. The total tax payable on the investment income earned by Jane would be $10,700.<\/span><\/p>\n<h4><i><span style=\"font-weight: 400\">Example 2 &#8211; gifting cash to a trust (not using a prescribed rate loan)<\/span><\/i><i><\/i><\/h4>\n<p><span style=\"font-weight: 400\">On their advisor&#8217;s advice, Jane and Bob meet with a qualified estate lawyer to create a family trust. Jane settles the trust and contributes the $500,000 in cash, naming Bob as the trustee and their two children as beneficiaries. Since Jane is the settlor of the trust, she ensures she is neither the sole trustee nor a beneficiary, to avoid the reversionary trust rules discussed above.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Bob, as trustee, elects to pay the interest income ($15,000) to Trevor to help pay his university costs. This income is taxed in his hands. Additionally, they withdraw $5,000 in EAPs from the RESP. The interest income and EAPs are taxed as regular income, and Trevor owes approximately $930 in taxes. By using his tuition tax credits, he may be able to bring this down to $0.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Bob then pays out the capital gains ($10,000) to Alice. Alice is a minor, but because the attribution rules do not apply to capital gains, they can be taxed in her hands. Only half of the capital gains are taxable, and she pays no tax on the income as it is her only income for the year.<\/span><\/p>\n<p><span style=\"font-weight: 400\">In this example, a total of $25,000 of investment income was paid out of the trust. Assuming Trevor has unused tax credits, no tax is payable, for a tax savings of $10,700 vs the first scenario!<\/span><\/p>\n<h4><i><span style=\"font-weight: 400\">Example 3 &#8211; using a prescribed rate loan<\/span><\/i><\/h4>\n<p><span style=\"font-weight: 400\">Had Jane instead loaned the $500,000 to the trust at the prescribed rate (currently 1% but will rise to 2% shortly), the income could be paid to either beneficiary without attribution.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">The trust would need to pay Jane $5,000 in interest, which is taxable to Jane. This results in taxes owing of $2,675.<\/span><\/p>\n<p><span style=\"font-weight: 400\">They could then pay the interest to Alice, and she would again pay $0 in taxes due to her basic personal tax amount. The capital gains could be paid to Trevor, along with an EAP withdrawal from the RESP for $10,000. In this case, Trevor would owe approximately $100 in taxes before applying tuition tax credits.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Assuming Trevor has unused tax credits, the total tax payable is $2,675, a tax savings of $8,025 vs example 1. <\/span><\/p>\n<p><span style=\"font-weight: 400\">Each scenario will be different \u2013 in some cases, the prescribed rate loan will allow for less total tax payable.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h1><span style=\"font-weight: 400\">Holding Companies<\/span><\/h1>\n<p><span style=\"font-weight: 400\">Physicians and other regulated healthcare professionals can incorporate their practice. It is commonly recommended to use holding companies to separate the retained earnings of the business to be used for investment purposes. <\/span><\/p>\n<h2><span style=\"font-weight: 400\">What is a Holding Company?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">A holding company is an entity formed to hold various types of investment assets and shares of your professional corporation. You then hold the shares of the holding company, sometimes alongside a spouse, children, or a trust.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Your professional company earns income and pays you salaries and dividends. After expenses, any retained earnings can be paid to the holding company without tax, where money can be invested in various assets like stocks, bonds, mutual funds, ETFs, real estate, etc. Eventually, the income earned on those investment assets is paid out to the holding company&#8217;s shareholders as dividends. In previous years, those dividends could be paid out to adult children and spouse shareholders and taxed in their hands. In 2018 however, CRA updated some rules known as Tax on Split Income (TOSI) which mostly eliminated the ability to split income using this structure.<\/span><\/p>\n<p><span style=\"font-weight: 400\">There is, however, still an opportunity that exists under the new rules. That opportunity is second-generation income.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">What is Second-Generation Income?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">Second-generation income is income earned on other income. In the example above, the income earned by the corporation and then paid to the holding company is considered first-generation income. That income can no longer be taxed in the hands of the spouse or adult children shareholders under the updated TOSI rules \u2013 it would instead be taxed at the top personal marginal tax rate.<\/span><\/p>\n<p><span style=\"font-weight: 400\">If that first-generation income is invested in the holding company, the growth and income earned from that investment is considered second-generation income &#8211; it is not derived from professional business income but from the portfolio of investment assets. CRA was asked to confirm their position on second-generation income and advised that this income does not fall under the new TOSI rules, meaning it can be paid out to spouses and adult children and taxed in their hands, so long as the holding company is not carrying on a business.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Let&#8217;s say you have a professional corporation (ProfCo) wholly owned by your holding company (HoldCo). After paying taxes, expenses, and salaries, ProfCo has $200,000 in retained earnings leftover. This $200,000 is then paid to HoldCo, which is not taxable to HoldCo. Holdco then invests the money in a diversified investment portfolio, which pays out an income distribution of $10,000. It is this $10,000 that can be paid out to shareholders of HoldCo and taxed in their hands.<\/span><\/p>\n<p><span style=\"font-weight: 400\">When using this strategy, consider setting up a separate account to keep track of the second-generation income.<\/span><\/p>\n<p><span style=\"font-weight: 400\">This strategy does have some risks. Whether or not the investment HoldCo is operating a \u201cbusiness\u201d for income tax purposes is notoriously ambiguous, as the term \u201cbusiness\u201d is not a defined term in the income tax act. Make sure you review this with your tax advisor before implementing.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h1><span style=\"font-weight: 400\">Using the Capital Dividend Account (CDA)<\/span><\/h1>\n<p><span style=\"font-weight: 400\">Within a private corporation, the capital dividend account, or CDA, is used to track amounts of tax-free dividends that can be paid out to shareholders. It is a &#8220;notional&#8221; account, meaning it is an account for record-keeping purposes and not a bank or investment account.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Capital dividends are derived from a few sources; however, the most useful source for this guide comes from capital gains.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">When you earn a capital gain personally, only half of the capital gain is taxable &#8211; the other half is tax-free. Similar tax treatment applies inside a corporation, but the mechanics are different. When a corporation earns a capital gain, half of it is taxable to the corporation. The other half creates a credit to the CDA, which shareholders can pay out tax-free.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Say you have a portfolio of index funds in your holding company. Your purchase price for the funds was $1,000,000, and the value has now grown to $1,100,000. In this case, your unrealized capital gain is $100,000.<\/span><\/p>\n<p><span style=\"font-weight: 400\">If you were to sell the portfolio and trigger the capital gain, the corporation would include $50,000 of investment income on its tax return. The other $50,000 would create a credit to the corporation&#8217;s CDA, which could then be withdrawn tax-free by the shareholder and used to fund education or other costs.<\/span><\/p>\n<p><span style=\"font-weight: 400\">When paying a capital dividend, you must file a capital dividend election form with CRA so they can confirm the balance. Your accountant will help prepare this for you.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h1><span style=\"font-weight: 400\">Other Sources of Funding<\/span><\/h1>\n<p><span style=\"font-weight: 400\">After using the above strategies, your child may still need additional resources. In Canada, a variety of financial assistance is available both federally and provincially. Most financial institutions provide loans and student lines of credit with attractive interest rates and other features. Much has been said about the bad side of debt, but if no other options are available, it can be the difference between your child attaining a valuable and fulfilling education &#8211; or not.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">If your retirement is secure, you can think about using your tax-free savings accounts. Withdrawals from TFSAs are tax-free and can be used for any purpose.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h1><span style=\"font-weight: 400\">Putting it All Together<\/span><\/h1>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Focus on RESPs first. Contribute as much as possible, and try to max out both the lifetime contribution limit of $50,000 and the grant limit of $7,200.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If you have non-registered investments, consider using a discretionary family trust for income-splitting.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If your practice is incorporated and you have a holding company with a family trust or adult children as shareholders, track the second-generation income from the holding company&#8217;s investment portfolio. It can be paid out to your children and taxed in their hands.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">If you are still short on your goal, help your children review student loans and lines of credit options through the government and your financial institution.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Withdraw the from RESP first where possible. Be mindful of your children&#8217;s tax rates and try to use the taxable portion of the RESP first. This increases your flexibility on future withdrawals.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Once the EAP withdrawals are finished, review your family trust or corporate structure with your accountant and financial advisor to determine the best way to fund additional expenses.<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">Lastly, if there are still non-taxable contributions in your RESP, withdraw them.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400\">Thanks for reading! If you found this guide helpful, feel free to share it with your friends, family, and colleagues.<\/span><\/p>\n<p><span style=\"font-weight: 400\">And if you have questions or want to chat; you can reach me here:<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"mailto:mark@sweeneybride.com\"><span style=\"font-weight: 400\">mark@sweeneybride.com<\/span><\/a><\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/hemingwayapp.com\/#_ednref1\"><span style=\"font-weight: 400\">[i]<\/span><\/a><span style=\"font-weight: 400\"> https:\/\/www.afmc.ca\/sites\/default\/files\/nationalreports\/2021_GQ_National_Report_EN.pdf<\/span><\/p>\n<p><a href=\"https:\/\/hemingwayapp.com\/#_ednref2\"><span style=\"font-weight: 400\">[ii]<\/span><\/a><span style=\"font-weight: 400\">[ii] https:\/\/www.canada.ca\/en\/revenue-agency\/services\/tax\/prescribed-interest-rates.html<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400\">The information contained herein has been provided for information purposes only.\u00a0 The information has been drawn from sources believed to be reliable.\u00a0 The information does not provide financial, legal, tax or investment advice.\u00a0 Particular investment, tax, or trading strategies should be evaluated relative to each individual\u2019s objectives and risk tolerance.\u00a0 This does not constitute a recommendation or solicitation to buy or sell securities of any kind.\u00a0 Wellington-Altus Private Wealth Inc. (WAPW) does not guarantee the accuracy or completeness of the information contained herein, nor does WAPW assume any liability for any loss that may result from the reliance by any person upon any such information or opinions.\u00a0 Before acting on any of the above, please contact your financial advisor.\u00a0 WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.\u00a0\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400\">\u00a9 2022, Wellington-Altus Private Wealth Inc.\u00a0 ALL RIGHTS RESERVED.\u00a0 NO USE OR REPRODUCTION WITHOUT PERMISSION.<\/span><\/p>\n<p><a href=\"http:\/\/www.wellington-altus.ca\"><span style=\"font-weight: 400\">www.wellington-altus.ca<\/span><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Post-secondary education is expensive &#8211; especially if your kids want to become healthcare professionals themselves. According to the AMFC Graduation Questionnaire, over 40% of medical school graduates in Canada had debt exceeding $200,000![i] If you have more than one child to provide for, the total cost of education can be enormous. Thankfully, there are ways [&hellip;]<\/p>\n","protected":false},"author":161,"featured_media":2972,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_oasis_is_in_workflow":0,"_oasis_original":0,"_oasis_task_priority":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[33],"tags":[21],"class_list":["post-3014","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-education-planning","tag-post-template-1"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Physicians: 3 ways to maximize education funding for your kids and save taxes | Sweeney Bride Squamish<\/title>\n<meta name=\"description\" content=\"3 ways physicians can maximize education funding and save taxes with RESPs, estate planning, and holding company vs. family trusts in Canada. 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