Automatic for the children

Opinion

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This article was published 18/05/2024 (479 days ago), so information in it may no longer be current.

The Canada Learning Bond is an important grant program for low income families to help save for their children’s post-secondary education. But it flies under the radar with most children who qualify missing out on free money to help them pursue higher learning.

That could soon change after the recent announcement in the federal budget to enrol any child automatically who qualifies.

“It’s certainly going to be positive,” says Tonya Gennings, regional vice-president of financial planning at BMO. “That’s because one of the biggest things has been that most people don’t know about it.”

The CLB program offers grants to low-income families from the federal government that are contributed to their children’s RESPs. To receive the grant, parents must open a RESP, but they do not need to make a contribution from their own savings to receive the CLB.

Upon opening the RESP, a qualifying child receives a $500 grant in the first year and $100 each year afterward that they qualify based on family income up to age 15 to a maximum of $2,500. (For families with three children or less, for example, the maximum household adjusted net income to qualify is $53,359 per year.)

The challenge, however, is many children who qualify do not have a RESP and cannot receive the bond.

“A lack of awareness and a lack of access to financial services are among the biggest barriers,” says Dr. Jennifer Robson, associate professor at Carleton University.

Launched in 2004, the CLB’s first cohorts are now starting post-secondary school, representing a fraction of those who would have been eligible when it started, she says.

Employment and Social Development Canada data show that even in 2012 in Manitoba, for example, only 19 per cent of eligible children received the bond.

By 2022, the share of eligible children increased to about 32 per cent. (The national average for enrolment is about 42 per cent.)

Yet even RESP enrollment is not as good as it could be, says Peter Lewis, president of CST Foundation, which offers robo-advisor RESP exchange-traded fund portfolios. “Human behaviour is such that if you have pressing issues today, you will put off something that is 17 years away.”

It turns out that many families delay and often forget.

Federal statistics show about 55 per cent of eligible children receive the Canada Education Savings Grant (CESG), the main benefit of an RESP.

Although it can be a low priority for families of all financial backgrounds amid the myriad of other costs, many parents see value in saving for post-secondary, says Andrew Lo, president of Embark, a non-profit RESP services provider.

“Based on our recent survey, most parents recognize the importance,” he says. Yet their recent poll also found 68 per cent of parents stated saving for their kids’ education is overwhelming, while 66 per cent said they would delay retirement to help pay for it.

Of course, opening a RESP and contributing — preferably as soon as possible to collect grants and reap compounding, tax-sheltered investment returns — is the best way to avert that latter scenario.

The CESG is a 20 per cent top-up on contributions to a RESP, per child, to an annual maximum of $2,000 in contributions, resulting in a $500 maximum yearly grant.

All told, children are eligible for $7,200 in CESGs in their lifetime. Low- and medium-income families are eligible for even more: up to $100 in additional CESG grants on the first $500 of annual contributions.

The RESP, when taken full advantage of, is certainly a potent tool.

For parents saving right after their child’s birth, making maximum contributions annually — and not receiving the CLB — they will have saved more than $68,000 when their child turns 18, based on an annualized return of five per cent.

For a four-year program in Manitoba, factoring in inflation, that sum should be more than enough to pay tuition costs for a four-year program, about $50,000.

Of course, the rest of the savings would likely be needed for thousands of dollars in textbooks and other expenses.

Parents whose children receive the CLB could save even more if they, grandparents or anyone who wants to contribute to the RESP, maximize annual contributions.

Even if a child only receives the maximum CLB, that could be more than $3,500 for post-secondary by age 18, and even small savings matter.

“There is lots of evidence that kids with some financial assets for education are more likely to graduate high school and go onto college, university or trades,” Robson says.

Additionally, Statistics Canada research shows individuals with post-secondary education generally earn higher incomes.

“So we have many good reasons to think this new program will have a meaningful impact,” she adds about automatic enrolment, which won’t start until 2028.

Any child born this year, who qualifies for the CLB, will be automatically enrolled in 2028, unless their parents have already opened a RESP and started receiving the CLB sooner.

Going forward, any child — who qualifies and has not had a RESP opened after four years — will automatically receive the bond in a RESP account.

Eligibility is retroactive, and so those who qualified and missed out will be eligible to get the CLB until age 30, under the new rules.

One challenge will be finding eligible children because eligibility is based on tax filing, and about 12 per cent of low-income Canadians do not file taxes, missing out on $1.7 billion in benefits from the Canada Child Benefit to the CLB, research shows.

Robson notes the 2023 budget outlined a plan to file taxes for low-income Canadians automatically, which will help — once in place — with automatic CLB enrollment.

Much work remains given the new initiative is “a complicated jigsaw puzzle,” she notes.

Yet it’s worth solving.

“It’s not just a good step forward,” Robson says. “It’s a great step forward.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com