Value Library

The following is an excerpt from the ABC Perspective - July 2004 - Pg. 3

I strongly believe in education and I am grateful that I have had a priceless opportunity to complete two university degrees and the Chartered Financial Analyst (CFA) designation.

As parents, my wife and I have always encouraged our four children to study hard and to prepare for a self-satisfying professional career. We will try to give each of our children the opportunity to fulfill their long-term aspirations through a first quality, higher education.

But a university education no longer comes cheaply. The costs today are anywhere from 5-10 times greater than when I attended university some 3 decades ago. Fortunately, we started to put money away as each child was born through annual contributions to a Registered Educational Savings Plan (RESP). Unlike a RRSP, RESPs provide no tax deductibility of annual contributions, however, RESP income is not taxable as long as it remains within a registered plan. Moreover, a RESP brings three immediate benefits: 1) it is a forced saving; 2) it will benefit from tax-free compounding as long as the funds remain in the plan and 3) the Government of Canada through a Canada Education Savings Grant or CESG will contribute up to a maximum of $400 per year or 20% of the annual RESP contribution (maximum $4,000 per child per annum).

When finally collapsed to fund a child’s higher education the RESP’s original contributed capital is returned tax-free whereas all other sheltered income is taxed in the student’s hands at his low tax rate. While this is a very simplistic overview of the RESP, I encourage interested readers to examine the plan more thoroughly for greater details.

Over the past few years, a number of ABC clients have asked us whether the ABC Funds were eligible for RESP. Many ABC investors, including myself, had wanted to utilize the ABC Funds for their children or grandchildren’s educational plan. Unfortunately, due to the finite life of a RESP, unlike a RSP (to age 69 and beyond as a RRIF) few institutions were willing to trustee the ABC Funds. They claimed it just wasn’t profitable for them. Nonetheless, we searched around. We asked banks and insurance companies. None were interested; I even offered to personally subsidize the cost. There were still no takers.

While disappointed, I, nonetheless, opened individual RESPs for my four children. I invested in a no-load bank fund although I had really wanted to tie my children’s RESP to my ABC Funds where I knew I could exercise greater responsibility and control. Having little choice, I stuck with the bank’s no-load fund for the past 10 years. The investment performance was very mediocre, but I rationalized I would wait patiently until an opportunity arose to switch to ABC Funds. This opportunity presented itself last September.

One Saturday morning last September I sat down to read Jonathan Chevreau’s column in the Financial Post entitled “Don’t Pass Up On Free Lunch For The Kids”. In the article, Jonathan referred to self-administered RESPs. Bingo! I had just discovered a solution to trustee the ABC Funds. On Monday I made several calls to brokers and I was able to set up a self-administered RESP for ABC Funds. I then redeemed my existing funds and transferred the proceeds to the ABC Fundamental-Value Fund for October 1, 2003.

Overall, I am pleased to report that my four children were the first ABC clients to utilize the funds for RESP. Now after 9 months, each of their plans has appreciated 20%. I believe the switch was well worth the effort. If anyone wishes to contact us with regard to the mechanics of utilizing the ABC Funds for a RESP within a self-administered plan, please call us anytime.

Irwin A. Michael, CFA