RESP Confidence Vote

March 11th, 2008 by Potato

Recently the opposition parties passed a bill from the Liberals making RESP (Registered Education Savings Plan) contributions tax-deductable, as RRSP contributions are. This was a huge gift to parents of kids who are college/university-bound, so much so that it threatened to overshadow the recent TFSA gift unveiled by the cons. In full-on “pay attention to meeeee” pre-election kitty mode, the cons couldn’t just seem to let that stand. So now they’ve threatened to turn it into yet another confidence motion. These kids are seriously itching for an election, and have been for some time now.

Under current rules, there is no immediate tax reduction for RESP contributions, which are allowed to compound free of capital-gains levies. Instead, the government matches a small percentage of parents’ contributions up to a maximum of $7,200 over the lifetime of the plan.

I’m actually a little torn on this issue. On the one hand, this is a really nice tax gift to parents and something that will help further the affordability of higher education for people that… well… could probably afford it anyway. On the other hand, this is getting to be too generous. The RESP already allows money put away for education to compound tax-free, and when withdrawn are taxed in the hands of the student (who is often in a lower tax bracket than the parent) and contributions get some matching money tossed in by the government to boot. Adding a tax deduction on top of that makes it hands-down the best place to put your money if you have a university-bound child.

I feel dirty for potentially agreeing with something the dirty, crooked, heartless cons might say, but I think that this tax break for RESPs might have gone too far. Of course, I’m not all that concerned with Flaherty putting the blame for losing the surplus on it — he’s blown far more money on far less worthy causes — but rather because I fear for the future of higher education, especially if the cons get another term. This improvement to the RESP (and lost tax revenue from the deductions) would give them just the sort of flimsy cause they need to proclaim that getting a university education is more affordable now, and cut back on government support, letting tuitions rise. This would of course hurt the low-income students who don’t have RESPs the most (for the rest, it may be zero-sum), and be a serious bummer to those who get advanced degrees and have to pay for extra years of tuition beyond what their parents might have saved for…

On the gripping hand, “Canada’s New Government” is being ridiculously juvenile by making yet another piece of legislation a matter of confidence. I can only hope that when the election eventually happens (we’ve had so many false starts in the last two years that I’ve stopped expecting anything) that the cons get soundly trounced.

Edit: What I’m trying to say here is that the tax relief for the RESP is really only going to help those families that already could save for their children’s education, it’s not really going to make higher education more affordable for everyone. Since this is going to cost the government in lost tax revenue, I think that money would be better spent in direct tuition relief or in a straightforward beefing up of the matching grants for RESP contributions.

2 Responses to “RESP Confidence Vote”

  1. Potato Says:

    Ellen Roseman commented about this in her blog and in her Toronto Star column.

  2. Potato Says:

    Another comment in the Globe and Mail by Kevin Milligan today. (Subscription required)

    The reported cost of RESP deductibility is $900-million annually. (This assumes RESP contributions don’t grow in response to the tax change – which they will.) For the same $900-million, we could send a $1,000 cheque annually to each Canadian undergraduate, or completely fund the operations and research at a university the size of McMaster, or quadruple the size of the Canada Research Chairs program, or double the size of the Canada Student Loans program. Instead, RESP deductibility funnels that $900-million to high-income households, the children from which are likely to attend postsecondary schools without any tax incentive. Is RESP deductibility really the best way to build our education system?

    I have little doubt that the RESP deductibility proposal will prove popular among RESP users. Who doesn’t want a tax break? But the right question isn’t whether students should be supported or taxes lowered. It’s whether the RESP deductibility proposal is the best way to achieve those goals.

    I think that last question is probably the important point, and I’m going to send off a quick note to my MP about it, recommending instead an increase to the CESG.

    Here’s my brief letter:

    Dear [my MP, a liberal]

    I’ve been following the media reports of the recent move to make contributions to RESP plans tax-deductible. Education funding and tuition issues are near and dear to my heart, and I have to say that the thought and goal behind this move is commendable. The cooperation between the opposition parties to pass this bill in the commons also exemplifies the best aspects of a minority parliament; different groups able to work together to pass important legislation, even if it doesn’t please the governing party.

    However, I believe that the actual implementation of this improvement to RESPs is misguided and not an optimal way to encourage all Canadians to save for higher education. A tax deduction gives the greatest benefit to those who make the most income, who are the ones that least need the incentive to save in a plan such as this. Some people still find the workings of deductions confusing, which also makes it a less effective incentive to save. I feel that the government’s money could be better spent by improving the matching grants that already serve as valuable reasons to save in RESP accounts. The CESG (Canada Education Savings Grant) matches a portion of the money that is contributed to a potential student’s RESP, currently 40% on the first $500, 20% on the next $2000, up to a maximum of $7200 in a lifetime. Increasing the CESG would be a fairer and more straightforward benefit to RESPs, and if I have the figures from the media right, it could be tripled for the proposed cost of the tax deduction.

    If the current bill is quashed in the senate or by a counter bill from the conservatives, I would encourage you and the rest of the loyal opposition to reintroduce a similar measure that instead improves the CESG.