Do we need up-front tax deductions for RESPs?

March 11 2008 by Ellen Roseman

Of course, Dan McTeague’s private member’s bill is popular with average Canadian families. They pay a lot of tax and like the idea of getting tax deductions for worthy causes, such as sending their kids for post-secondary education.

The problem is: Does such as idea make sense? Is it good tax policy? And most important, will it help low-income students who wouldn’t normally go to college or university?

After I wrote my Sunday column on this topic, and got trounced by many readers, I thought of a few points I didn’t make.

What happens when parents can’t keep contributing to an RESP for 18 to 20 years? Sometimes, you’re faced with marriage breakup, illness or job loss and you have to deplete the savings earmarked for education. If there’s an up-front tax deduction, then the original contributions plus any accrued return would be taxed at the time of withdrawal. This would result in a very large tax bite, not what you want when you’re already in a financial crisis.

What about the student’s tax position? Normally, they pay no taxes on the RESP proceeds because only the investment gains are added to their taxable income. With the new plan, they would have to pay on all the money withdrawn. Again, that’s counter-productive.

Don Drummond, a TD Bank economist and former finance department official, put out a report today, suggesting it was time to rethink how governments provide financial assistance for post-secondary education.

In his view, tax deductions favour those with higher incomes. That’s because the value of the deduction rises as you move up the income tax brackets. So, it’s wonky to think this will favour income redistribution.

“If improving access to education of children of low-income families is the goal, then we are not on the right path,” he said.

Maybe the RESP no longer makes sense now that the tax-free savings account has been introduced. The TFSA offers many of the advantages of RESPs with fewer restrictions.

Since McTeague’s bill offers lucrative tax deferral — and we know Canadians are likely to take advantage of the proposed new scheme — the extra cost would be $2 billion a year if tax deductions for RESPs were allowed, says Drummond. That’s double the estimate of the finance department. For that massive amount going into post-secondary education, it’s important to ensure the best bang for the buck.

11 comments

  1. Jo

    Mar 11 2008

    I commend Ellen for her position.

    I work in the University sector and I can tell you that the numbers cited in these comments are greatly inflated. (Students don’t live in residence for four years LW; also Mr. McTeague uses scary 2020 figures but doesn’t account for inflationary increases in income or compounding).

    At the Ontario university where I work tuition is LESS than it was when I attended the institution 10 years ago once inflation is factored in. My brother is just finishing his education degree part time and guess how much it cost him over two years? – $5,000. A pretty amazing deal.

    The average graduating debt load at my institution is less than $20,000 for a four-year degree. Many MANY students take out the maximum loans unnecessarily because they choose not to have a part-time job. Graduating with reasonable student loan debt is not a bad thing.

    It blows my mind that parents kill themselves to pay for 100% of their kids’ education. Guess what I hear on the bus that I travel on everyday with your kids? How they are blowing the money partying.. how they just bought the latest cell phone or DVD… of course, many don’t take the bus because they have new cars..

    Target additional funding of post-secondary to increase accessibility to students with legitimate financial need. Don’t give another tax cut to the middle class. Parents – you aren’t doing your children any favours by doing everything for them. Give them a kick in the butt to start saving for their own education. They’ll value it more – trust me! If you don’t believe me I implore you to visit a post-secondary campus to people watch for a while..

  2. Potato

    Mar 11 2008

    I tend to applaud almost any action the government takes to support education, but I can’t say I like this tax deduction for RESP contributions plan. As others have said, it’s most helpful to those who least need the help saving. The money would be better spent on tuition support, or on beefing up the matching grants the government already uses to encourage RESP contributions (CESG).

  3. Tony

    Mar 12 2008

    Another issue that this article ignores is that actually students are in a remarkable tax situation. During my university years I paid almost no taxes, even when I worked high paying labor jobs during the summer. The tax credits you receive as a student save a lot on taxes.

  4. Gerry

    Mar 12 2008

    I can’t say whether it is good or bad, but the government call for the Senate to quash it is wrong. The Senate is only supposed to refuse legislation in extraordinary circumstances. The government being caught with its pants down in not the extraordinary circumstance contemplated.

    Not knowing all the facts, I can only imagine that the government didn’t expect this bill to come up, and were missing some of its members for the vote, or similar. If so they are getting what they deserve.

  5. Big Cajun Man

    Mar 18 2008

    I think that the RESP program itself is a good idea and it works well. Making it more RRSP-like doesn’t make a lot of sense to me, but maybe it would help other folks. I’m not sure.

    I have been using RESPs since my kids were quite young and have been moving gift money there all along. Hopefully it will lessen the blow of my kids going away to university.