Commons passes private member's bill giving new RESP tax break
Last Updated: Thursday, March 6, 2008 | 7:29 PM ET
The Canadian Press
A private member's bill has quietly passed through the Commons that could give parents substantial tax breaks for saving education money and cost the federal treasury almost $1 billion annually.
The bill, if passed into law, would allow parents to contribute up to $5,000 annually to a Registered Education Savings Plan for each child — and deduct the amount from their income taxes.
It could also bring federal coffers closer to a potential deficit than Finance Minister Jim Flaherty projected in his budget of just over one week ago.
The bill, first introduced by maverick Liberal MP Dan McTeague almost two years ago, essentially treats RESPs like Registered Retirement Savings Plans.
"It's the same rules that apply that are identical to RRSPs," McTeague said in an interview Thursday.
"When the contribution is removed down the road,yes it is taxed, but at a level that a student pays," he explained.
"I don't know of many students who are making, you know, $100,000 a year, so the tax would be negligible."
Should the money be withdrawn for any reason other than education, or by the person who made the contribution in the first place, much higher tax penalties would apply.
Under current RESP rules, Canadians can contribute after-tax money to RESPs and anything earned inside the accounts grows tax free. The federal government also matches 20 per cent of contributions, up to $7,500.
There is also a $50,000 lifetime contribution limit, which McTeague's bill would maintain.
While the Conservatives voted en masse against the bill, it was supported by all three opposition parties, along with independent MPs, and passed easily late Wednesday by a margin of 156-122.
Measure could cost $900 million a year
In March of last year, when the bill was first debated at a Commons committee, finance department officials estimated it could cost the treasury between $600 million and $700 million a year in lost tax revenue, depending on how many Canadians contributed to RESPs, and how much.
More recently, however, the department has projected a higher uptake by parents looking for a tax incentive to aid them in saving for their childrens' education, and a higher cost estimate of $900 million annually.
That could take a significant chunk of cash away from the government at a time when it's preparing for a tight economic squeeze.
In his Feb. 26 budget, the federal finance minister projected a surplus for the fiscal year that starts April 1 of just $2.3 billion, a relatively small cushion considering the overall size of the budget, at $239.6 billion.
The surplus drops even further for the 2009-10 fiscal year, to an estimated $1.3 billion — its lowest level in a decade — as the government projects lower tax revenues from a slowing economy and even higher spending.
The current RESP setup costs taxpayers upwards of $750 million annually, with only 30 per cent of students taking advantage of the program. Add a tax incentive, and that amount could go even higher.
But the cost is worth it, and will pay the country dividends in
the long run through a larger number of young Canadians attaining higher education, and potentially better-paying jobs, McTeague argues.
"It's a question of priorities," he says.
"These are clearly investments that Canada cannot afford to escape, given the need for us to compete in a knowledge-based economy."
Private member's bills rarely become law, but this one is now headed to the Senate, which is dominated by Liberal appointees.
McTeague said he expects it to pass, with the support of his party and leader.
