Education Planning

In the US, the primary means of saving for your, or your children’s education is a Section 529 plan or the Coverdell Education Savings Account. Although they provide excellent benefits from a US perspective, Canada Revenue Agency doesn’t recognize the tax deferral that the IRS does. This means these accounts are generally taxable in Canada and reported on your T1 tax return.

The primary means of saving for education expenses in Canada is a Registered Education Savings Plan (RESP). This account allows you to contribute up to a lifetime maximum of C$50,000 (after-tax) for each beneficiary. The real benefit is if you contribute C$2,500 or more, the Government of Canada will contribute another C$500 to the account (a 20% match) through the Canada Education Savings Grant (CESG) up to a lifetime maximum of C$7,200. Lower income contributors may get up to C$600 in matching grants. However, if you are an American citizen or green card holder, the IRS does not recognize the tax-deferral of the RESP on your US return and this account will be included in your estate for estate and gift tax purposes.

Tax Incentives

There are several tax incentives in both the US and Canada to encourage education. In the US, the most common ones are the Hope Scholarship Credit, Lifetime Learning Credit, Student Loan Interest deduction and the Tuition and Fees deduction. All of these are generally phased out for high-income workers. In Canada, there is the education amount, which provides a tax credit for the number of months you are in school. There is the tuition amount that provides a credit for the cost of tuition and other credits for textbooks, employment income, moving expenses and public transit passes. These credits, if not used in the current tax year, can be carried over to future tax years when you may be in a higher income bracket.