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 With the new plan, they would have to pay on all the money withdrawn.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.