Using a family trust to finance your child's education
Family trusts have been used for generations to hold wealth and property for children and grandchildren. A lesser-known benefit of family trusts: they can also be used to finance your children's education in a tax-efficient manner.
Bill Steele, a 44-year-old business-owner and Chartered Accountant, took the advice of Alan Stewart, his Investment Advisor, to create a family trust as a means to pay for his two children to attend an independent school.
"The RBC Dominion Securities Family Trust is a fully documented trust that allows Canadians to save taxes by earning investment income and capital gains in the hands of children or grandchildren who pay little or no taxes," explains Stewart, an Investment Advisor and Financial Planner with RBC Dominion Securities. "Every child or grandchild in Canada who has no other income can earn up to a certain amount of investment income tax-free every year. The Family Trust can be established to take advantage of this annual opportunity while still providing the parent, in certain circumstances, with control over the monies loaned to the trust."
The strategy of diverting income to your children or grandchildren through a trust is possible because every person in Canada, regardless of age, can earn about $10,000 in interest income, $20,000 in capital gains or $50,000 in eligible dividends a year before they are required to pay any income tax (Ontario). Children are unlikely to have any additional income, so any investment income and capital gains earned in a Family Trust can be distributed to the children and will likely be tax-free in their hands.
"Basically, we set up a trust and lend the money to it at the current CRA prescribed rate of 1%. The rate is fixed for the life of the loan, regardless if interest rates rise. The income earned on the investments can then be used to pay for private school tuition or for other endeavours that benefit our kids, such as tutoring, music lessons and sports fees," says Steele.
Families can use a lawyer to set up a trust, but RBC Dominion Securities offers an "off-the-shelf product" that clients can use instead –a template for setting it up where all the legal work has already been done.
"For our family, this financial strategy will not only reduce our tax burden, but it will benefit our children," says Steele.
There are other options available to families when deciding how to afford a quality education, including:
- Paying the full tuition in advance, often offered at a discounted rate
- Tuition payment plans that spread payments over 10 or 12 months
- Financial assistance in the form of scholarships or bursaries
- Religious education tax deductions
- Special needs/medical tax credits
- Personal loans
To learn more about family trusts or what options may be best for your family, please consult with your legal or tax advisor, or contact Alan Stewart* at [email protected] For more information about independent schools visit www.educationoakville.com.
There are three major benefits of setting up this Family Trust:
1. Tax savings.
Assuming your child or grandchild has no other income, in certain provinces they can earn up to approximately $10,000 of interest income, $20,000 of capital gains, or $50,000 of dividends from Canadian public companies eligible dividends tax-free every year due to their basic personal tax exemption.
2. Access to capital.
The parent or grandparent can loan monies to the Family Trust so they will never lose access to the loan capital.
3. Fund children's expenses.
The investment income earned in the trust can be used to pay for expenses that directly benefit the child or grandchild (e.g. private school tuition, post-secondary education costs, lessons, camps, etc).