The trust trap

.

  By Guest Blogger Sinan Terzioglu

.

The average annual tuition cost for an undergraduate program in Canada has been steadily increasing over the years and now stands around $8,000. For students who need to live away from home, housing expenses vary significantly depending on location and type of accommodation, typically ranging from $10,000 to $20,000+ per year. When combined with tuition, the total annual cost for post-secondary education can easily exceed $25,000.

Assuming a 3% annual inflation rate, the total annual cost could reach $42,000 in 18 years, amounting to approximately $168,000 for a four-year program. For parents aiming to cover most of their children’s post-secondary education expenses, it is essential to implement an effective savings strategy as early as possible.

I was recently asked about this:

.

My son was born this year, and my parents have generously gifted $50,000 to put towards his education. I understand that a Registered Education Savings Plan (RESP) is the best account for saving for post-secondary education because my son can receive up to a 20% education grant on the first $2,500 contributed each year.

I know that contributing $50,000 now to get the $500 grant for this year and missing out on future grants would very likely result in a higher RESP value after 18 years compared to contributing $2,500 annually or $16,500 in the first year and $2,500 annually thereafter to maximize all the grants. However, I hate missing out on free money.

I came across a strategy that utilizes an In-Trust For (ITF) account in conjunction with a RESP to maximize the grants, and it looks like this approach can yield even greater results versus a lump sum $50,000 contribution to a RESP. What do you think of using an ITF account in conjunction with a RESP?

An ITF account is informal because it does not require a deed of trust for its creation, unlike a formal trust. Setting up an ITF account is cost-free, and its main advantage is that all capital gains would be attributed to your son (essentially no tax), while all investment income (dividends and interest) would be attributed to you the trustee.

To implement the strategy, in the first year you would contribute $16,500 to your RESP (which would secure the first $500 grant for year 1) and $33,500 to a new ITF account set up for your son. After one year, you would need to transfer $2,500 annually from the ITF account to your RESP for the next 13.4 years to receive the $500 education grant each year. This approach will help you reach the maximum $50,000 lifetime RESP contribution limit and obtain the $7,200 in grants provided by the government.

Assuming a long-term average annual return of 7%, contributing $50,000 to your RESP now and receiving a $500 education grant in the first year, while foregoing all future grants, would result in your RESP growing to over $170,000 after 18 years. On the other hand, implementing the ITF strategy in conjunction with a RESP and earning the same long-term average annual return of 7% would result in a RESP valued at over $143,000 and an ITF account valued at over $50,000 after 18 years, yielding 10-15% more than the lump sum contribution of $50,000 to the RESP.

Although the ITF strategy has the potential to yield a larger total investment value, I advise against implementing this strategy for the following reasons:

ITF Accounts are Irrevocable: Once the account is set up and funds are contributed, the assets legally belong to your son and the funds cannot be reclaimed or redirected by you once they are placed in the ITF account.

Loss of Control: Once your son reaches the age of majority, he would gain full control over the ITF account. This means he can use the funds for any purpose, not necessarily for education.

Complex Administration: Managing an ITF account can be more complex than other savings vehicles. It requires careful tracking of contributions, income, and withdrawals to ensure compliance with tax rules and to maximize benefits, which can be cumbersome.

Legal/Tax Issues: Transferring funds from the ITF to a RESP could trigger capital gains and raise questions about the true ownership of the ITF assets, potentially causing tax issues if challenged by the CRA. Also, if the value of the ITF account exceeds $50,000 even for a single day during a year, you may need to file a T3 trust return.

An alternative strategy to ensure you receive all the education grants is to use a new non-registered account designated for your son’s education assets instead of an ITF account and follow the same approach. By primarily investing the assets in the non-registered account for capital growth and incorporating some tax planning, the tax attribution to you can be kept relatively low, especially if you have capital losses to offset capital gains. Most importantly, you will retain control of the assets, which will be beneficial if your son decides not to pursue post-secondary education.

In summary, if you are fortunate enough to contribute $50,000 towards a young child’s post-secondary education, a lump sum contribution to a RESP will likely cover most, if not all, of the costs for a four-year post-secondary program in Canada. Additionally, you won’t have to worry about potential tax issues or losing control over a portion of the assets.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

.

About the picture: “Just west of Cochrane, Alta there is the Yamnuska Wolfdog Sanctuary that currently cares for 50+ wolves,” writes Brent. “Some were hoarding rescues, others were breeding situations that irresponsible owners couldn’t take proper care of. Pictured is Atka. Thanks so much to you Garth and your dynamic team.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/04/25/the-trust-trap/