Budget's changes to 3 registered savings plans could affect how you invest this year and beyond
The big news for high-income earners in this past week’s federal budget was the retooling of the Alternative Minimum Tax system, but there are a few other items of note that could be helpful to know as you consider how to invest in 2023, particularly when it comes to registered plans.
Registered education savings plans (RESPs)
RESPs are tax-assisted vehicles designed to help families save money for their kids’ post-secondary education. RESP contributions may be eligible for government matching grants, such as the Canada Education Savings Grant (CESG), generally equal to 20 per cent of the first $2,500 of annual contributions per RESP beneficiary for each year, up to a lifetime maximum of $7,200 in CESGs per beneficiary.
RESP contributions, which are not tax-deductible when contributed, can generally be withdrawn tax free when it comes time for postsecondary education. These are called “refunds of contributions,” or ROCs. If contributions are not withdrawn while a child is attending post-secondary school, however, CESGs may need to be repaid.
Any other funds coming out of the plan for postsecondary education are referred to as “educational assistance payments,” or EAPs. These include the income, gains and CESGs in the RESP. EAPs are taxable to the student, who may end up paying little or no tax based on the availability of various tax credits and whether they had other income in the year.
At first glance, it might seem attractive to only withdraw ROCs, since they are simply non-taxable, but if the goal is to minimize the family’s taxes throughout the entire course of the kids’ studies, it’s probably better to create some income each year in the form of EAPs to fully utilize the student’s annual basic personal amount ($15,000 in 2023) and, potentially, other available credits such as the federal tuition credit.
Under current rules, the Income Tax Act limits the amount of EAPs that can be withdrawn during the first 13 consecutive weeks of enrolment to $5,000 for full-time students and only $2,500 for part-time students. For many students, especially those who live away from home, this $5,000 EAP limitation during that first semester is woefully inadequate considering the costs of tuition, books, residence fees, meals and other sundry expenses.
The federal budget proposed to increase these limits, effective immediately, to $8,000 for students enrolled in full-time programs and up to $4,000 for part-time students. Individuals who withdrew EAPs prior to March 28, 2023, will be able to withdraw additional EAPs up to the new limits. Note that RESP promoters may need to amend the terms of their existing RESP plans to apply the new EAP withdrawal limits.
The budget also proposed to change the rules for joint subscribers. Under current rules, only spouses or common-law partners can be joint subscribers of an RESP. Parents who had opened an RESP as joint subscribers prior to a divorce or separation can maintain this plan afterwards, but they are currently unable to open a new RESP as joint subscribers. The budget proposed to enable divorced or separated parents to open RESPs as joint subscribers for one or more of their children, or to jointly move an existing RESP to another financial institution, effective immediately.
Registered disability savings plans (RDSPs)
If you or someone in your family is living with a disability, then the RDSP can be an excellent way to save, tax deferred, for the future as well as potentially collect valuable government grants and bonds. Launched in 2008, the RDSP is a tax-deferred registered savings plan open to Canadians eligible for the disability tax credit (DTC.) Up to $200,000 can be contributed to the plan and, while contributions are not tax deductible, all earnings and growth accrue tax deferred until withdrawn from the plan.
The main allure of the more well-known registered plans, such as the registered retirement savings plan (RRSP), registered retirement income fund and tax-free savings account (TFSA), is the ability to earn tax-deferred or tax-free investment income. While this holds true for the RDSP, its main advantage is the ability to supplement the plan with government funds: Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) are both potentially available for RDSP beneficiaries aged 49 and under.
Many RDSPs are set up by parents for their minor children, but challenges arise when an RDSP is set up by an individual who has reached the age of majority, but whose contractual competence is in doubt. In these situations, the RDSP plan holder must be that individual’s guardian or legal representative as recognized under provincial or territorial law. Practically, however, establishing the authority of a legal representative can be a lengthy and expensive process that can have significant repercussions.
A temporary measure, which is set to expire on Dec. 31, 2023, allows a “qualifying family member” (parent, spouse or common-law partner) to open an RDSP and be the plan holder for an adult who doesn’t have the capacity to enter an RDSP contract and who does not have a legal representative. The budget proposed to extend this qualifying family member rule by three years to Dec. 31, 2026.
In addition, the budget proposed to broaden the definition of a qualifying family member to include a brother or sister of the beneficiary who is 18 years of age or older. This will allow a sibling to establish an RDSP for an adult with a disability who does not have the capacity to enter an RDSP contract and who doesn’t have a legal representative.
First home savings accounts (FHSAs)
The government confirmed that financial institutions may start offering the new FHSA as of April 1, 2023. Most financial institutions are currently working towards launching FHSA offerings later in 2023.
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Once launched, the FHSA will give prospective first-time homebuyers the ability to contribute up to $40,000 and save on a tax-free basis towards the purchase of a first home in Canada. Like RRSPs, contributions to an FHSA are tax deductible and withdrawals to purchase a first home, including withdrawals of any investment income or growth earned in the account, are non-taxable, just like TFSAs. As the government stated, “Tax-free in; tax-free out.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.
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