It's Your Money  

Should you pay for your child’s university education?

High cost of education

Back to school time puts education at the forefront of most parents’ minds. And for many parents, many of these thoughts are about their kids going off to university at some point and how they plan to pay for it.

But should you pay for your child’s university education? If you have the resources to do so, many parents assume that it’s the right thing to do but it may not be that simple.

Is simply paying outright for their education the best method? What will it teach them about financial responsibility? Will they take their courses seriously if they’re not footing the bill or will they just do the bare minimum to get by and party the rest of the time?

University should be partly about getting out into the world, having some fun and earning some valuable social skills but the financial aspects should not be too easily ignored. The cost itself can be staggering.

The average four-year degree program, including books and living expenses will run close to $100,000 right now if you’re not living at home. For a child born in 2013, this cost will climb to around $140,000 by the time they’re ready to start their post-secondary educations.

Many parents are mentally committed to paying for their child’s entire post-secondary education, even if they can’t afford to. Doing so could put their own retirement plans in serious jeopardy though.

Speaking to a Certified Financial Planner (CFP) professional and creating a financial plan is paramount to determining what you can really afford.

But what if you have the funds available? Let’s say you saved diligently in your RESP plan and have enough money set aside or if you simply have the disposable income on hand to foot the bill? Paying your child’s full way still might not the right solution – at least not without some planning and conditions.

Whether you have the funds or not, that degree is going to cost a fair bit of money and your child should be taught to understand the significance of the investment you’re making in them. So, what should you do?

One option that I particularly like is to have your child take out student loans, even if you have the funds available. Their student loans will attract no interest until after they’re done their program and they can be paid back in full at any time.

Not only that, but you can also hold onto the investments for four more years and can earn some extra growth during that time. RESP money can be drawn out of the plan while they go to school but can be reinvested in a TFSA or non-registered plan to keep growing.

But here’s where the financial education part comes in. Sit down with your child and discuss the terms for using the education money you’ve set aside to pay off the loans. This might be as simple as saying that you’ll pay the loans off in full once they earn their degree but if they drop out part way through, the loans are theirs to pay back.

You might base the loan repayment on the marks they attain as well. If they achieve a 4.0 GPA, you’ll pay off 100 per cent of their debt. A 3.5 or higher might warrant a 90 per cent loan repayment and so on.

The terms that you settle on are up to you, but some variation of this suggested structure would go a long way in teaching your child financial responsibility and help to ensure that they take their course load seriously.

For those parents fortunate enough to be able to pay for their child’s education, take some time to think about exactly how you want that process to play out. Simply paying their education costs as they come up may not be the best way to truly help them.


Election impact on portfolio

Canadians are heading to the polls in two weeks and just like the lead up to past elections, investors are asking how this might affect their portfolios.

The short answer (so you can stop reading here if you want) is it likely won’t matter that much. The Canadian federal election should have very little impact on your investment accounts.

Let me explain.

First of all, the Canadian stock market represents just three per cent of the global markets, so a well-diversified investor should have low exposure to Canadian equities. So if the election did impact Canadian companies in a big way, your portfolio should be well-insulated.

Secondly, the major political parties in this race all intend to provide the economy with ample fiscal support until the COVID recovery is complete. While their policies differ substantially, all three major parties are committed to keep helping our economy along.

Third, the performance of Canadian equities, bonds and our dollar are largely hitched to external global factors and our domestic markets are less impacted than our general economy is by federal decisions. I think it’s important to understand that our economy and our markets are not one and the same.

There is no question that certain sectors of our markets will be far more directly impacted by the election results though. Our commodity industry for example has a lot riding on this race and over-exposure to these types of investments requires far more careful consideration.

Could we see a major stock market pullback this fall or winter? Absolutely! It’s always possible but the cause of a pullback or correction would be from some other catalyst and not our election.

Ultimately, the upcoming election is unlikely to have any significant short-term impacts on your investment portfolio so stick to your properly diversified investment strategy and sound financial plans.

And make sure to get informed and get out to vote.

TFSA over contributions

While the goal with a Tax-Free Savings Account (TFSA) should be to contribute as much as you can within the limits of your available contribution room, you also need to be mindful not to over-contribute.

Putting more money in a calendar year than you’re allowed by law could result in penalties. The severity of which will depend on the circumstances of the over-contribution.

Over-contributions made by mistake – If you unintentionally over-contributed because you believed you had more contribution room available than you actually did, what happens?

  • The CRA confirmed that those over-contributed amounts will result in a one per cent penalty tax assessed on the over-contributed amount (technically referred to as the “excess TFSA amount”).
  • This penalty tax is calculated monthly, based on your highest excess TFSA amount for that month, and this penalty tax will continue to apply for each month that the excess amount remains in your TFSA.

What can you do?

  • In an effort to minimize this penalty, you should plan to withdraw the excess amount as soon as you become aware of the issue.
  • Also, new TFSA contribution room that becomes available each year will also serve to reduce an excess TFSA amount.
  • So, in situations where you’ve identified you’re in an over-contributed state in your TFSA and it's near the end of the year, waiting until the new year may help eliminate the excess amount and avoid having to withdraw anything.

Deliberate over-contributions – Where you’ve over-contributed on purpose and it is determined to be a "deliberate over-contribution" based on the requirements of the Income Tax Act, the CRA confirmed that you will be subject to:

  • the one per cent penalty tax on the excess amount as outlined above, plus
  • a 100 per cent “advantage” tax which is calculated on any income or capital gains attributable to the deliberate over-contribution.

Basically, whatever investment earnings or gains you generated on the deliberate over-contribution will need to be paid to the CRA as the advantage tax, along with the penalty tax. This advantage tax continues to apply until you withdraw the deliberate over-contribution AND any associated income and capital gains from your TFSA.

How would the CRA know whether an over-contribution is a deliberate over-contribution or a mistake?

The reality is they won’t necessarily know and would need to review all the facts pertinent to your situation to come to a conclusion. That said, however, the CRA did also indicate that it “will closely examine any unusual TFSA transactions and will challenge aggressive tax planning where appropriate.”

To conclude:

Ultimately, understanding the implications of being over-contributed ensures you can act quickly when an issue is identified. This should also provide the foresight to avoid any aggressive planning or schemes with your TFSA that may seem “too good to be true.”

Where you are unsure of your contribution limit, the best source to confirm your available room is with the CRA themselves – typically through the 'My Account' portal via their website.


5 bad investing mistakes

The investment world is often a very confusing and difficult maze for the average consumer to sort through. With countless different investment options, it’s no wonder that many find themselves unsure of who to trust or what to do.

While you likely won’t become an expert in all aspects of the investment world, identifying and watching out for these major pitfalls can help keep your portfolio protected and your retirement on track.

1 – Being overly greedy. After years of impressive stock market returns like we’ve recently seen, it is easy to allow greed to take over and consider putting all of your money into the higher risk parts of your portfolio that have earned the highest returns.

Instead of allowing this basic human emotion to take control of your decision making, you should maintain realistic return expectations and keep a well balanced and diversified portfolio through good times and bad to smooth out the inevitable market volatility.

2 – Buying into bubbles. While this should be common sense, it’s a sin that is committed again and again during each market cycle. The “tech bubble” of 2000 would be a classic example as sound reasoning and rationale were thrown out the window as people kept buying these assets long after the valuations had gone through the roof.

3 – Allowing your pride or ego to get in the way. Do you think investing is easy? Are you confident that you’re smarter than everyone on Bay Street and Wall Street?

Even the most seasoned investment managers know that they will never understand every aspect of the marketplace and that they will be wrong some of the time. Check your ego at the door, ask for advice when necessary and ensure that your portfolio can withstand the hit if you make a bad choice.

4 – Trying to time the market. There is nobody who knows for sure what direction the stock markets will go all the time. So trying to base your decisions of when to put money in or take it out on market timing is a near impossible task and the costs of being wrong are huge.

Instead of trying to time the market fluctuations, consider putting money in on a regular basis (dollar cost averaging) and taking money out in a similar fashion (such as taking regularly monthly RRIF payments). Likewise, the ideas of moving everything to cash for a period of time can be equally costly and if you have a well-balanced portfolio that fits your risk comfort levels, you should have no reason to mess around with it.

It’s time in the market, not timing the market, which will lead to long-term growth.

5 – Choosing the wrong advisor. With most Canadians relying on advisors to help guide them through this complex world, the largest mistake you can make is picking the wrong person for that job. Outside of Quebec, there are no job title restrictions in place in our business so that means it’s up to the consumers to decipher what qualifications their chosen advisor really has.

For example, the average consumer may not know that a CFP (Certified Financial Planner) professional has taken a multi-year course and exam load to achieve that prestigious designation while someone else who has the title “Financial Planner” on their business card may have done nothing more than write a quick 45 minute life insurance agent exam.

While by no means exhaustive, the above list gives you an overview of the largest and most common mistakes that many Canadians make in managing their investments. Regularly review your own investment plan to ensure that you’re not committing any of these deadly mistakes.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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