Sonia, 27, hopes a graduate degree will boost her career prospects. She has savings in a TFSA, RRSP and a non-registered stock account; should she use this money to cover her tuition, or are there other options?
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Q. My daughter, Sonia, is 27 years old with a bachelor’s degree in English from a Toronto university. Needless to say, she is currently not working in the field that she was trained in. She thinks going back to school would enhance her employability in the writing and publishing industry, so she applied to—and was accepted at—two universities in New York City.
The cost of tuition as well as living in the U.S. is not cheap. Tuition for a master’s degree alone amounts to $53,000 USD, or about $70,000 CAD. Now the question is: How does she pay for it? Sonia has $40,000 in a stock market account, a $25,000 TFSA* and a $40,000 RRSP account, all started by her at the age of 18. Do we liquidate everything, and what are the consequences of that?
I have other questions as well. Does she take out a line of credit? Or some other kind of loan? Can she get a student loan for an American university? Can a Canadian get American scholarships for things other than sports? Any advice would help. –Tammy
A. You have an interesting dilemma and several different options are available to help Sonia come up with the $100,000 CAD that she will likely need to complete her U.S. degree ($70,000 in tuition plus $30,000 or so for living expenses), including:
Getting a line of credit specially designed for students
Applying for grants, scholarships and bursaries
It may be that a combination of some or all of the above-mentioned strategies is the way to go.
First, let’s consider liquidating the trading account (which you refer to as Sonia’s stock market account) as well as liquidating the TFSA*. The good news is that liquidating the TFSA doesn’t incur any tax liability. So the entire $25,000 in the TFSA will be tax-free when withdrawn. Selling the equities in the trading account, however, will trigger capital gains tax if the investments Sonia made over the years are worth more when she sells them than on the day she bought them. In Canada, 50% of the value of any capital gains is taxable.
The total amount of tax Sonia will pay when she sells depends on her income the year that she sells the stocks. So Tammy, if your daughter has a fairly high income this year—say, over $40,000—and her income is likely to be lower next year, she may want to consider selling these investments after January 1, 2020. And if it turns out that she does owe capital gains tax in 2020, she won’t have to pay it until April 30 of 2021. A tax accountant would be helpful in determining a strategy that could help her minimize taxes from the stock sales.
In regards to the RRSP* account, Sonia has a couple of options. For instance, she could simply withdraw the $40,000 from the RRSP account (or a lower amount, depending on how much she needs). But remember, any withdrawals from your RRSP are immediately subject to withholding tax. If she withdraws up to $5,000, the withholding tax rate is 10%; if she withdraws between $5,001 and $15,000, the withholding tax rate is 20%; and if she withdraws more than $15,000, the withholding tax rate rises to 30%. Depending on her tax bracket, she may be able to get some of this tax money back when she files her tax return. Again, your accountant would be able to give you more details.
Alternatively, Sonia could choose to make withdrawals from the RRSP under the Lifelong Learning Plan (LLP). This is a government program that allows a student to assume an interest-free loan from the RRSP. Under the LLP, she can withdraw up to $10,000 from her RRSPs in a calendar year, up to a total of $20,000.
Sonia must also meet the following criteria in order to participate in the LLP:
She must be a full-time student;
She must be a Canadian resident; and
She must be enrolled in an educational program at a designated educational institution
If Sonia decides to go this route, she will be responsible for making sure that she qualifies for the LLP. This is important because if a condition is not met while she is participating in the program, she will have to include the RRSP withdrawal as income on her tax return for the year she received the funds.
Also, while “designated educational institution” is a university, college, or other educational institution, there are some differences on whether the institution is located in Canada or outside Canada. For more detailed information see the definition of “designated educational institution”. If you have any questions or concerns, call 1-800-959-8281. And for more information on eligibility and rules, please check with the Canada Revenue Agency website
Note, the money you can withdraw from the LLP is not exclusive to just tuition and school fees—the money can also be used to cover living expenses such as rent, groceries and transportation, to name a few. And even though the repayment requirements for the LLP are quite small, Sonia may want to consider a more aggressive repayment schedule of the LLP loan after graduation to facilitate re-growth of the RRSP.
Sonia may also want to explore student lines of credit. Many of these don’t require repayment until graduation but each financial institution has different rules and requirements. It pays to check the fine print of these lines of credit before applying, but they could be helpful if expenses turn out to be much greater than the $30,000 she’s budgeted, provided that, again, she pays them off within a couple of years of graduation once she has a full-time job.
And finally, there are grants, scholarships and bursaries she may qualify for. Unlike student loans, scholarships and grants don’t have to be repaid. Websites such as ScholarshipsCanada.com allow interested students to search through thousands of scholarships and prizes for Canadian students that are administered by both schools and private organizations.
Occasionally, the Canadian government also provides scholarships and bursaries to students who wish to study abroad. There might be some that can be used to help finance a post-graduate education in the U.S.
Also, Canadian students can contact their schools directly to discuss financial aid options. Many colleges and universities provide financial aid packages to students, which may include some aid for international students. Keep in mind that if a college or university has significant funding or is particularly eager to recruit international students, it may be more willing to provide generous financial aid packages to foreign students.
If we assume your daughter doesn’t qualify for any grants or scholarships, and if she’s debt-averse, she could liquidate the TFSA* ($25,000), use the RRSP* Lifetime Learning Plan to the maximum of $20,000 (if she qualifies) and the remaining money could come from the sale of her stocks ($40,000, bearing in mind that some capital gains taxes may be due at tax-filing time.). This would provide her with about $85,000, which would cover tuition plus some expenses. If she needs more, she could always dip into the remaining $20,000 in her RRSP and pay the tax upon withdrawal or use a student line of credit to help her with expenses.
Of course, the best strategy for your daughter will be the one she’s most comfortable living with even after she graduates with her master’s. But I would be remiss if I didn’t mention that while a degree from a prestigious university is an amazing accomplishment, good employment opportunities after graduation are usually not a given. For this reason, I would try to keep the debt incurred to a minimum. And the sooner Sonia gets a good-paying full-time job after graduating, the faster she can return to building her nest-egg for future goals and needs.
Heather Franklin is a fee-for-service certified financial planner in Toronto.
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