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Grant strategy can provide immediate education cash

Gerry's a great neighbour. He's a procrastinator, but a great neighbour.

He has three kids, ages 18, 14, and 12. His 18-year-old son, Jared, is attending university for the first time this fall. When I asked Gerry if he had saved for Jared's education, he simply told me that they had been meaning to get around to saving, but procrastinated.

"Tim, as a chronic procrastinator, I live by a creed: I shall meet all important deadlines directly in proportion to the amount of bodily injury I can expect to receive from missing them."

"Are you going to find it tough to pay for Jared's education?" I asked.

"Sure," Gerry replied, "but there's a second part to my creed: I shall never forget that the probability of a miracle, though infinitesimally small, is not exactly zero."

Well, at least Gerry's optimistic.

I then shared with Gerry a clever strategy using a registered education savings plan (RESP) that can provide a tidy sum of cash, almost immediately, to help pay for Jared's education costs.

The grants

By now, you may be familiar with the Canada Education Savings Grant (CESG) -- a grant paid by the government to an RESP when RESP contributions are made for an eligible child. The CESG is equal to 20 per cent of the RESP contributions, provided the child has CESG "room." (The CESG for low- and middle-income families could be slightly higher since the CESG rate is higher on the first $500 of RESP contributions when family income is $70,000 or less.)

Your child, if he's resident in Canada, will accumulate CESG "room" of $2,000 each year after 1997, up to and including the year in which he turns 17. The CESG is payable on contributions made to an RESP, but only as long as your child has CESG room. If you don't use up the CESG room available in a year by making sufficient contributions to an RESP, the unused room can be carried forward.

The strategy

Now, for the clever idea. Suppose Gerry were to contribute $4,000 (the annual maximum) for each of his three children to a family plan RESP in 2004. This would be $12,000 in total in 2004. CESGs of 20 per cent, or $2,400, would be paid into the plan the month after this contribution (each of his kids has sufficient unused CESG room that grants would be paid on the full $4,000 contributed for each).

Suppose that Gerry is able to come up with another $12,000 for contributions in January, 2005. This will result in another $2,400 of CESGs paid into the RESP a month later in February. So, by February, there will have been $4,800 of total grants paid into the RESP, and these funds will be available for payment to Jared.

This $4,800 is free money from the government, and will go a long way toward paying Jared's tuition for this school year. It will also give Gerry a head start in saving for the education of his other kids.

This idea is possible because the CESG money paid into an RESP for a particular child doesn't have to be paid out of the plan to that beneficiary. In the case of an RESP that is a family plan, the grants can be shared with other beneficiaries of the plan, as long as no beneficiary receives more than $7,200 of total CESG money out of the plan in a lifetime.tcestnick@aic.com



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