RESP – Family Plans: using in-kind contributions
By John Hale, CPA, CGA
An RESP combines flexibility, tax-deferred investment growth and direct government assistance to help you reach your education savings goals for your children or grandchildren.
George and Sara have two children (Billy and Julie), ages 7 and 4. They started contributing to a family RESP plan when Julie was born. They have recently had to stop making contributions due to cash flow issues. Fully funding the education plan is a priority for them and they have considered selling some of their non-registered investments to help fund their education goal. Because they hold a Self-Directed RESP, it is not necessary for George and Sara to sell their investments to make contributions to the RESP.
A better solution would be to contribute in-kind a portion of their investments into the RESP each calendar year. This avoids having to physically sell the investment (and being uninvested between the date the investment is sold and when it is eventually purchased back in the RESP). In addition, it is very easy to implement (instructions can be confirmed with your Financial Advisor and forms are usually not required). For tax purposes, investments contributed into the RESP are treated as if the investment was actually sold. Therefore, this contribution may trigger a taxable capital gain (if there is an unrealized gain on the investment). If the investment has an unrealized loss, the resultant capital loss cannot be claimed.
Ed and Victoria are interested in helping out their grandchildren with their post-secondary education. They are currently retired and are considering a higher withdrawal rate from their investments to help fund this goal. Instead of withdrawing extra income (and potentially increasing their taxable income), it would be beneficial to open up a Self-Directed RESP (Family Plan), and start making in-kind contributions from their investment account.
Your Financial Advisor can help select which investments would be most suitable to contribute into an RESP, taking into consideration your investment objectives, risk tolerance and time horizon for the plan, along with tax minimization.