At least, that’s what I thought until I looked closely at the figures and talked to financial experts. What I learned will be a relief to every parent. First, you don’t need to save as much as you think. And second, if you do it right, saving that money won’t cramp your family’s lifestyle. Here’s how.

Set a realistic goal

According to the 2004 — 2005 Guide to University Costs in Canada, compiled by USC Education Savings Plans, the cost of a four-year program for a child born in 2004 will be $66,816 if you live within commuting distance of the college or university. It will be $134,987 if you have to pay for room and board on top of tuition and books. For parents with two or more children, those estimates are positively panic-inducing. But read the fine print and you’ll see they include “incidental expenses” such as local travel, entertainment and cable. Should you really be worried about saving for these items? Probably not.

For a more realistic estimate, let’s start with $4,400, about the national average annual tuition fee last year. Assuming tuition grows at the same rate as inflation, you can expect to pay around $6,500 a year when your child starts university in 2023. Over the course of a four-year program, the total tuition would be about $27,000. Include textbooks and equipment and the all-in cost is about $35,000 over four years.

You can save that by putting away just $20 a week. (I’ll explain how later.) But before we get into the calculations, let me assuage your guilt complex. As parents, we want to help our kids get the best possible start. But that doesn’t mean we have to shell out for every three ring binder they will ever need until they finish a master’s degree. You can teach your children an important lesson by putting some of the responsibility on them. “Kids learn a lot by having to work part-time through school,” says Sandra Foster, a financial educator and the head of Headspring Consulting Inc. in Toronto. “So before you think about how much you’re going to need to put away, think about what would really be in your child’s best interest.”

Patricia Lovett-Reid, senior vice-president of TD Waterhouse and the mother of four, agrees. “We sat down with each of our children and said, ‘We will fund to this amount, but we expect each of you to put in $2,000 a year,’ because I think that’s a reasonable amount they could save. We really thought there should be an incentive and a commitment on their part financially.”

Here’s how the numbers work in my case. Based on my $35,000 estimate for four years of tuition, books and supplies, minus $3,000 a year in summer job revenue that I expect my daughter to kick in ($2,000 a year in today’s dollars, adjusted for inflation), my goal is to save $23,000 by the time she turns 18. By then, my husband and I expect to have retired our mortgage, freeing up $1,000 a month for unexpected expenses, such as room and board if she chooses to attend a university out of town.

Pick a savings plan

Once you’ve decided on a realistic savings goal, you need to choose an investment plan that does three things. First, because your investment horizon is fairly short — a maximum of 18 years — your plan should protect your principal against a market downturn. Second, your plan should produce decent growth and compound your savings. Finally, unless you’re an investing expert, you probably want a low-maintenance program that won’t require you to make constant investing decisions.

Do it yourself

For most people, a self-directed Registered Education Savings Plan (RESP) fits the bill perfectly. You can set up one of these plans through your bank at no charge (although there may be a small annual maintenance fee of $50 or so) and it works like a self-directed retirement savings plan. You can make lump-sum contributions or arrange for monthly debits from a bank account and you can place those contributions in GICs, mutual funds, treasury bills, even stocks and bonds. There are no foreign content limits on your investments. And although your contributions are not tax deductible, the money in an RESP grows 100% tax-free until your child needs it to fund her education — and at that point it’s taxed at her rate, not yours. Since her income will likely be low, she will probably be able to combine her basic personal exemption (currently $8,012) and tuition tax credits to offset any taxes owing on her withdrawals.

Best of all, even if your stock picks perform dismally or bond rates are in the basement, you’re guaranteed a 20% return on the first $2,000 of what you contribute every year for every child, courtesy of the federal government’s Canada Education Savings Grant (CESG). Put in $1,000 a year and you pick up a free $200; put in $2,000 and you’ll get the maximum $400 grant. This grant money grows with the rest of your savings and compounds for even bigger returns. Factoring in the CESG and assuming average annual returns of 5%, I need to save only $16 a week, starting when my child is an infant, to hit my $23,000 goal by the time my daughter turns 18. If I want to build in a cushion, I can raise my contribution to $20 a week. Based on the same assumptions as above, that should compound into the full $35,000 cost of tuition and books by the time my daughter hits 18.

The one drawback to a self-directed RESP is that you have to make investing decisions for your child, which can be stress-inducing if you’re a novice when it comes to stocks and bonds. A simple and smart choice is to put your child’s money into a good, low-cost balanced mutual fund. (See Suzane Abboud’s Best Mutual Funds 2005 for some good candidates.) A balanced fund holds both stocks and bonds and provides a way to give your child a diversified portfolio in one easy swoop. If, for whatever reason, you don’t feel comfortable with a balanced fund, you can have a financial adviser oversee an RESP on your behalf; just remember that his fees will cut into your returns.

Playing pool

Once upon a time, the only RESP option was a socalled scholarship trust, a pooled investment that parents buy into by purchasing units in the trust. The two largest of these, Canadian Scholarship Trust Plan (CST) and USC Family Education Savings Plans, have been around since the 1960s. These firms manage your funds and guarantee your principal by sticking to safe investments such as government bonds and GICs.

Canadians have more than $5 billion in scholarship trusts, but the plans are plummeting in popularity now that most financial institutions offer self-directed RESPs that are more flexible and more transparent. Last summer, scholarship trusts came under scathing criticism from the Ontario Securities Commission, which lambasted them for luring customers with questionable marketing tactics, hidden fees and downplayed risks.

You should take the trusts’ marketing hype with a huge grain of salt. Many claim to achieve above-average returns. Many also promise to top up their payouts with the forfeited earnings of people who drop out, or whose kids don’t go on to post-secondary education. In 2002 — before the Ontario Securities Commission report — CST was claiming an 11.04% return for members whose children completed post-secondary studies that year. However, when MoneySense contacted its head office to get more details, we found the savings plan that earned 11.04% was no longer sold and that the 11.04% figure doesn’t take management fees into account. Details about those fees, which can be extremely high, are buried in the fine print of CST’s eye-blurring 68-page prospectus.

A major concern about many scholarship plans is their limited flexibility. While most will allow you to adjust your monthly or yearly contribution to reflect your financial situation, they also penalize or even disqualify you for missing payments. So if you have one or two months when your cash flow unexpectedly dries up, your entire RESP could be in jeopardy. Stringent rules can also be a problem when it comes time for your child to collect. Most plans mete out payments once a year for four years. That’s not ideal if your child’s financial needs fluctuate from year to year of study, or if she goes to university for more than four years. In contrast, a self-directed RESP lets you make withdrawals anytime you see fit and the plan doesn’t have to be closed until the end of the 25th year after you opened it, which should give your child plenty of time to earn a master’s degree.

Self-directed RESPs are nearly always a better way to save for kids’ schooling than scholarship trusts, but if you’ve already signed up for a scholarship trust, you don’t have to panic and cash out. The Ontario Securities Commission was clear that the problems with these plans relates to the way they are sold, not their accounting practices.

Trust us

An informal trust used to be one of the most popular ways for parents to put aside money for post-secondary education, and some people still swear by this method. Start-up is as simple as making an appointment with your bank or financial adviser to open a savings or brokerage account in trust for your child. To make it official, you must name a beneficiary (your child, of course) and a trustee (your spouse or any adult who is not the donor).

A trust fund’s main appeal is that it can be used for anything that is related to your child, not just his or her education. You can treat it as an emergency fund — if you’re laid off, you can tap the fund to cover the cost of food, clothing and other child-rearing expenses. In contrast, if you were to withdraw money early from an RESP, you may pay a stinging 20% penalty and lose any government grant money.

There are drawbacks to a trust, however. The biggest is that you miss out on the 20% government grant, or CESG. Maintaining a trust is also more work than an RESP. Because the income that grows within the trust is not tax-sheltered, you may have to file a tax return in your child’s name to report the income. Capital gains are not likely to be a problem — they’re taxed at your child’s rate, so unless she’s earning huge sums, she probably won’t have to pay any tax. But dividends and interest may be taxed in your hands.

Most frightening of all, when your child reaches the age of majority — 18 in most provinces — the trust is hers. So if she decides to blow it on a sports car or a trip to Rome instead of law school, you have absolutely no say in the matter. (If you want to stipulate that the funds can only be used for education, you have to open a formal trust, which means hiring a lawyer and paying legal fees.)

My advice is that unless the freedom to access your money at any time is worth more to you than a guaranteed 20% return, stick with an RESP for at least the first $2,000 a year of education savings. Then, since you won’t receive any CESG money for contributions above $2,000 a year, you might start an informal trust with any educational savings left over. This half-and-half approach gives you the best of both approaches: a trust’s flexibility along with free money in your RESP.

“To me the RESP is a no-brainer,” says Heather Clarke of Investors Group in Winnipeg. “A guaranteed 20% return — you probably need to go back to school yourself if you don’t realize that’s a great deal.”

The answer is that the taxman is a tough opponent. Despite what you may think, there are no gaping easy-to-use loopholes that you can use to make your taxes magically shrink. In fact, the system is designed to leave most salary-earning middle-income families with very little discretion when it comes to toting up their tax bill. Gym memberships, magazine subscriptions and European vacations definitely fall into the prove-it category. Unless you’re successfully self-employed and able to demonstrate that such expenses are an integral part of your business, the taxman isn’t going to be impressed.

Does that mean you just have to sit back and take whatever the tax authorities decide to dish out? Not at all. If you truly want to cut your tax bill, a few strategies allow you to substantially reduce the amount you pay. These strategies are perfectly legal, but they typically require professional advice to set up, and you should weigh the cost of the advice against the tax savings before deciding if the strategy is worthwhile. Some of these tax manoeuvres also involve hidden pitfalls that you must be careful to avoid. Still, if you truly want to cut your tax bill, these aggressive strategies may be just what you’re looking for.

Mortgage magic

The idea

Jim has a mortgage of $150,000 on his home. He also has an investment portfolio of $180,000. His accountant tells him that he can’t write off interest costs on his mortgage, but he can write off interest costs on loans he takes out for investment purposes. So Jim gets an ingenious idea: why not sell his investment portfolio, use the proceeds to pay off his mortgage, then borrow the same amount of money to buy back his investments? It seems to him that this shift should leave him with the same amount of debt he has now, but allow him to deduct the interest on his loans from his taxable income.

The pitfalls

This strategy is not only perfectly feasible, it’s actually recommended by some financial planners. However, if you’re going to give it a whirl, don’t skip any steps. For instance, if you have a portfolio of stocks you own outright, as well as an existing loan that you used to buy a boat, you can’t just start claiming that the loan was really taken out for purposes of buying the stocks. To make your loan tax-deductible, you have to actually sell your stocks and pay taxes on your capital gains (which can be substantial if you’ve held your investments for a long time). You then have to pay off your boat, take out a new loan and repurchase your stocks. And don’t count on being able to claim a capital loss for investments that have fallen in value since you purchased them. If you sell an investment at a loss and repurchase the same investment within 31 days, the tax department will assume you’re trying to create an artificial loss and deny your claim.

How to make it work

Wait until your mortgage comes up for renewal to avoid penalties. Follow all the steps to the letter — sell your investments, pay down the mortgage, and then borrow to repurchase the investments. If you sell your investments at a loss, make sure you wait at least 31 days before repurchasing the same investments, or buy something different.

Who it makes sense for

People who have an investment portfolio as well as a mortgage or other consumer debt.

A debt defying feat

The idea

Marilyn has heard about a book written by Fraser Smith, a financial adviser in Victoria, that promises to make her mortgage tax-deductible. Unlike the Mortgage Magic strategy above, the so-called Smith Manoeuvre doesn’t require that you have an investment portfolio as well as a mortgage. All you need to do is to shop around for a credit line that’s set up with separate “subaccounts” to track both deductible and non-deductible debt.

With that in hand, you begin the process of shifting your borrowing from areas that aren’t tax-deductible to areas that are. Let’s say that Marilyn has a $300,000 mortgage, which she replaces with a line of credit. Let’s also assume that Marilyn’s first monthly payment of $1,500 reduces the principal of her non-deductible home loan by $300 (the rest of the payment goes to pay the interest on her loan). As soon as her home loan goes down, she then re-borrows $300 from the credit line to purchase investments, thus making the interest on this portion of her debt tax-deductible. Every time Marilyn makes a mortgage payment, she increases her investment loan accordingly. Over several years, her total debt remains $300,000, but the tax-deductible proportion of her borrowing steadily increases.

The pitfalls

In a word, risk. Your debt level never decreases and if your portfolio suffers a setback, you wind up with the worst of both worlds — lots and lots of debt as well as big losses on your beaten-up investments.

Barbara Garbens, president of B L Garbens Associates Inc., a financial planning firm in Toronto, suggests that most people should approach the Smith Manoeuvre with caution. “Most people want the peace of mind that comes with being debtfree. Who’s to say that there won’t be another market crash, or that clients won’t lose their jobs and be on the hook for thousands of dollars in debt, deductible or not?”

How to make it work

Make sure you can stomach the risk and stress involved in living with lots of debt. Choose your investments carefully — excess risk is a recipe for disaster. Finally, make sure the records on your credit line document the deductible and non-deductible portions of interest paid.

Who it makes sense for

People who are comfortable with risk and already have a large mortgage, but no investments, may want to explore the Smith Manoeuvre, but should be aware of the dangers.

A home run … maybe

The idea

Brad, a highly paid executive, and Sharon, a stay-at-home mom, own their own home in Ottawa. Not only does Brad’s salary put him in the top tax bracket, he’s built up a substantial investment portfolio that generates income of about $30,000 a year. He wants to get some of his income into Sharon’s hands where it will be taxed at a lower rate, so he decides to buy Sharon’s share of the family home. He will pay her by putting his investment portfolio in her name. Brad and Sharon figure they’ll save a bundle by having the investment income from their portfolio taxed at Sharon’s minimal level rather than at Brad’s highest rate.

The pitfalls

The plan can work, but a transfer of ownership with assets changing hands must “really be dressed up properly” to withstand a challenge from the authorities, says Keith Rosen, tax partner at the accounting firm of Stern Cohen LLP in Toronto. Brad can’t just ask his broker to move $400,000 from his investment portfolio into Sharon’s name, and assume all is well. If assets are changing hands, a change in title on the property must be registered, and in Ontario, the spouse selling her share has to pay land transfer tax. (The exact rules on land transfer taxes differ from province to province.) Brad and Sharon also need to file a statement known as an “election” with their tax returns so that Sharon will be able to claim the investment income from the money she’s receiving.

There are other potential problems. If Brad’s investments have gone up in value since he bought them, he will have to pay capital gains tax on his profits. But things don’t work the same in reverse. If there’s a loss on his investments, the tax department won’t allow Brad to claim it on his tax return because of the spousal relationship between him and Sharon.

How to make it work

Consult a professional. Before you commit yourself, add up all the costs involved (legal fees, land transfer tax, potential capital gains tax) and make sure that the tax savings are worthwhile.

Who it makes sense for

Couples who make dramatically different amounts of money and who will save enough in taxes to outweigh the legal and accounting costs.

The downsizing dance

The idea

Steve and Maria are on the verge of retirement. Both of them have worked for years, although Maria has accumulated a much larger investment portfolio than Steve. They plan to sell their home, which is now worth about $500,000, and buy a smaller country property for $300,000. Their plan is to take the money from the sale of their current home and split it down the middle. Then, when it comes time to buy the country property, they’ll engage in some fancy footwork. Maria will put $250,000 towards the purchase, while Steve will contribute only $50,000. They figure this will leave each of them with equal-sized investment portfolios, which will effectively split their investment income and reduce their tax bill.

The pitfalls

This is a workable strategy, says Rosen, although he points out “the burden of proof is always on the client” when dealing with tax authorities. If challenged, Steve and Maria need to prove that Steve contributed to the original downpayment for the purchase of their first home as well as mortgage payments. Otherwise, some of the income and gains on his investments would be taxable in Maria’s hands.

How to make it work

Check that both you and your spouse contributed to the purchase of the first property and that you have the paper trail to support that claim. Consult a certified financial planner for help in determining how best to divvy up the capital.

Who it makes sense for

Couples who have very different incomes and intend to sell their home upon retirement.

Build your own tax haven

The idea

Suzanne earns $100,000 a year in her work as a marketing executive and is looking for ways to reduce her taxes. She’s heard that if she sets up a sideline business from home, she can write off the expenses related to the business and reduce her overall taxable income. Suzanne has always had an interest in photography, and figures if she could sell a few pictures, she should be able to write off her equipment, her home office/studio, and maybe even her travel expenses.

The pitfalls

“Not so fast,” says Sylvia Sarkus, a certified financial planner in Toronto. It’s quite legitimate to write off business expenses against your income from the same business, but you can’t write off expenses on your self-employment sideline against your taxable income from other sources (like your day job) indefinitely. Posting losses for three consecutive years or longer is a definite red flag for the tax authorities. Sarkus advises self-employed clients to show a profit, however small, rather than continue to report losses. In particular, a taxpayer is specifically not allowed to use home office expenses to create or increase a business loss.

How to make it work

If you have a skill in an area such as photography, carpentry, or making snowshoes, and you’d like to make some money from it, make sure you structure it as a business. Consult an accountant about the types of expenses you should be documenting. Your goal should be to earn some extra income tax-free, rather than to reduce tax on your other sources of income.

Who it makes sense for

Budding entrepreneurs or those who would like to turn a hobby into a source of income.