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How to pay for your children’s education & save thousands in taxes

Baby MoneyThe scenario: Wondering where your money has gone. You just took out cash and you’re already staring into an empty wallet. A myriad of fees and tuitions are looming.

Simply put, you have children and, worst (best)-case scenario, they’re all planning on going to university! People often say, maybe a little euphemistically, that kids are your biggest investment. It then follows that their education is the biggest installment into this investment.

When I attended university, things were different. It was the ’90s and it took five years of high school to get in. No web meant research was painstakingly conducted at the library, and university costs, although not cheap, were not extortion either!

The cost of education today is shamefully high, even after factoring inflation. Many parents will likely have to help their kids pay for their education, or pay for it in its entirety using RESPs and post-tax savings.

However, for incorporated business owners, doctors and consultants, there’s another option — using their corporation. This may seem strange at first, but here’s what my team and I recently did for a married couple. Let’s call them John and Jane.

John and Jane have two children, Sam and Sandra, let’s say, who are 16 and 13. Both are expected to go to university when they turn 18. John and Jane run a business that they’ve incorporated. They contribute the maximum to their children’s RESPs, but still fear this may not cover all the educational expenses for the anticipated four or more years each will attend university.

We suggested John and Jane pay themselves a relatively low salary from their corporation and pay the rest of their required living expenses in dividends to save taxes. Any additional funds after living costs should be kept in their corporation. In Ontario, the corporate tax rate (up to $500,000 earnings) is only 15.5%, which means they will be paying considerably less taxes than if they took a higher salary or dividends.

Fortunately, they received good tax planning advice and set up a holding company to own their corporations. Any additional funds kept inside the operating company can be flowed tax-free up to the holding company.

Now, here’s where things get interesting. Not only can John and Jane be listed as owners of the holding company, but so can Sam and Sandra, each having their own class (A, B, C & D) of shares.

When Sam goes to university at 18, he can receive corporate dividends and be taxed as an adult. The corporation could declare a “special dividend” for holders of Class C shares, in which he is the only holder, of, say $40,000. If he doesn’t have another source of income, he could potentially receive up to $50,000 in dividends tax-free in Ontario, depending on the amount of education credits he receives. In other words, he wouldn’t pay taxes. If he does get a part-time job, it will lower the amount he can get in dividends, but not significantly.

This is a very powerful scenario that many entrepreneurs and doctors don’t know about. If you are incorporated and think this is something that you could take advantage of, feel free to contact me for advice at your convenience.