Almost two years ago Liberal MP Dan McTeague first introduced a bill that has surprised the financial world. The industry has been watching it move through the lawmaking process. It amazes the watchers that this bill is still alive and has actually made its way through the House of Commons.

If passed into law, it would allow parents to contribute up to $5,000 annually to a Registered Education Savings Plan (RESP) for each child, and deduct the amount from their income taxes in the same way as Registered Retirement Savings Plan, RRSP contributions. A person in the 40% marginal tax bracket would receive a tax refund of $2,000 on a contribution of $5,000.

Under current RESP rules, contributions to RESPs are not tax deductible, but earnings inside the account will grow tax-free. As well, the federal government matches 20% of contributions via a grant program, up to $500 per year, with a lifetime maximum of $7,200. As it stands now, the bill would keep the current grant program rules if the bill becomes law.

The general consensus of the wording is that the bill is designed so that if a student continues on to higher education and uses the money for education purposes, the withdrawals would be taxed in the student’s hands at their respective tax rate. But if the child does not attend higher education, the money can be withdrawn and taxed back to the original contributor, probably a parent.

Although an intriguing concept, the bill still has a long way to go as it heads for the Senate. The Department of Finance has already said that the bill will cost the government too much money and they do not want to interfere with the current government surpluses. It is anticipated that the government will introduce amending legislation to counter the bill and mitigate the cost.

It’s all speculation for now, but it’s exciting to watch and see how things will play out. We will surely keep you posted on any further developments as they are announced.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.