Should we put money in RESP or in-trust account?

After reading my material, I have my conclusion as follows:

1. RESP can give you some tax benefit, but you have to plan well.
2. You don't have to pay tax when it is still in the account. But when you take it out, you have to pay the tax on growth. The bad thing is that the growth is taxed at your marginal tax rate. If your investment growth is from capital gain, you pay double tax than out of RESP. What is worse, you have to pay additional 20% special tax. The good thing is if you do not take money from RESP, but use it for your child's education, since you child is in low tax bracket, you will not pay tax.
3. Due to the tax regulation, I think it is not a good idea to pass $100,000 limit on your RESP. Note that this is not the contribution, but the contribution plus all the growth and government benefits. If you have more than $100,000 and your child is in 4 year undergraduate education, your child can take out about $25,000 each year. If you have more money, you child still pay some tax, and the more money take out, the more tax you pay. And do not forget if you child is not going to university, the penalty is huge when the account is more than $100,000.
4. As a result, if you have strong ability in invest, especially > 20% gain per year, you should contribute little and let the money grow.
5. When the money exceeds the $100,000 limit, change it to GIC. Think it as your secure part of the portfolio and you have more room to invest more risky outside of RESP.
6. Let's say if your growth is $50000 in the account, you can see that you do not save much money on tax, especially the gain is spread in 17 years. (The best case is you save $12500 tax for the capital gain if that gain comes out of RESP)
7. Your child take out that money out of RESP after year 17. So before the age of 17, it is a good idea to establish the in-trust account to get some tax benefit too. So my point is you can establish both account.


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You can see some source from the internet below

Everyone loves his/her children. But before you buy RESP for them, please read this article.

RESP & CESG vs. in Trust Accounts - Which is Best?

Which tell us a different story and the conclusion is that you should not buy RESP.

Also you could read this article

An educational RESP for rising costs - Which do you choose?

Please note that some part of the article is outdated and you should look at CRA's
website for newest update and consider your own situation.

Also, here is another article how to split some investment income to child.

Quick Tip: Invest CCTB or UCB payments in your child’s name
http://www.redflagdeals.com/forums/showthread.php?t=387941&highlight=jande9

Brief RESP fact:

Maximum contribution: $50000

Canada Education Savings Grant: 20% of $2500 annually, that is maximum $500/year. In your income is low, it could be up to $600/year.

Withdraw and tax:
Before you withdraw the money, you do not have to pay any tax.

When the money is withdraw for education purpose by your child, it will taxed on the child,
normally no tax since they have no income. There is no limit on withdraw after 13-weeks
study. It is a good news if you have a lot of money in RESP. Withdraw as much as money
possible in a low tax bracket and you could leave some money less than the money you
put in after child finish the study since that part is not taxed.

If you have some money left, either your child didn't use all the RESP or did not attend
secondary education, then

1. You don't need to pay the tax on the money that is equivalent to the contribution amount (the money you put in).

2. Remaing money could be transferred to parent's RRSP, up to $50000, if parents have that RRSP room.

3. Then, the unfortunate part comes. All the remaining money is taxed as parent's income at the marginal tax rate plus 20% additional tax.

Don't forget that if you have a lot of capital gain, if it is outside RESP, it will only be taxed on half tax.

Normally, when you give your child money and he or she invests it and it earns interest or dividends, this investment income is taxed as if you had received the income. It is "attributed" back to you. While capital gains are taxed in the hands of the child.

For In-trust account,

Interest and dividend income is taxable in the hands of the donor
capital gains are taxed in the hands of the child.
Interest earned on interest is taxed in the hands of the child (the same goes for dividends).
Any income(interest, dividend, capital gain) earned from Child Tax Benefit contributions is taxable in the child's hands.

Since your child is in low tax bracket, you actually pay little tax on it.

Also since the account is an informal trust (there isn't a formal trust deed) Revenue Canada could consider the arrangement a revocable trust and attribute any capital gains to t! he donor rather than the child. To protect from this a prior Revenue Canada opinion may be required or donors could use the format of irrevocable gifts from one person to another to be held in trust for the child so there is a clear separation between donor and child by the intermediary person acting as trustee.