A Reader, Delander, forwarded me a story about some problems he’s had with a TD Canada Trust RESP account he opened for his grandchild. You can read the sordid details on Red Flag Deals (as well as some responses best summarized as “I don’t know what I’m talking about but I’m going to make sweeping assertions” which is obligatory for a typical RFD thread). I’ll try to summarize the situation here.
When you put money in an RESP for a minor, you get an instant Canadian Education Savings Grant (CESG) worth 20% of the principal contributed (subject to a variety of requirements). A child can accrue up to $7200 in CESG money. The principal contributed and CESG money can be used to invest in a variety of instruments with any number of banks, including in a TD Canada Trust RESP account.
It’s often possible, however, to get more “free” money for an RESP than just the CESG.
- Additional CESG (A-CESG). Kids with low income parents (read the rules, don’t depend on this site for definitive information) may be able to get “Additional CESG” money. The government provides up to another 20% (this percentage is means-tested) on up to $500 in contributions per year. In total that’s an extra $100 grant per year, but the total possible CESG grant is still capped at $7200 including any A-CESG money.
- Canada Learning Bond (CLB). If a kid’s parents are low income earners and receive the National Child Benefit Supplement then the child may be able to get the Canada Learning Bond added to their RESP. It’s an up-front $500 grant, an extra $25 to defray RESP account costs, and $100 a year thereafter up to age 15 (assuming the child remains eligible).
- Alberta Centennial Education Savings Plan Grants (ACES). In Alberta there is a provincial RESP grant program. It’s an immediate $500 ACES grant and another $300 before the child turns 15. (There’s also a program in Quebec but I didn’t research it.)
Of course, Cat gets none of this money because we live (1) in Canada where building wealth is punished and (2) in Ontario where, to make money, we can’t just take oil out of the ground in buckets. But there’s rarely a “free lunch” and you’ve got to get what’s yours, so I’m happy to report Delander expects his grandchild to be eligible for all three programs. But this is where Delander’s problem begins.
As we discussed earlier, contributions and CESG money can be put into a variety of eligible investments; that’s true for TD Canada Trust RESP accounts, too. But TD Canada Trust RESPs severely limit the destination of money from A-CESG, CLB, or ACES. These “extra” funds can only be put into term deposits or GIC accounts. No mutual funds, no e-Series index funds, no bonds. Obviously he doesn’t want the $1000+ of extra grant money to languish in a ridiculously low-rate GIC. And if his grandchild gets more money from these programs in the future, the losses would only get worse. While Delander wants to continue banking with TD, he has found only one solution: move the RESP account. Most other banks are happy to invest A-CESG, CLB, and ACES money. He intends to take the entire RESP account to RBC.
After researching the situation, I think Delander is right to raise his concerns and to help inform people about these TD Canada Trust RESP limitations. If you’re going to start an RESP and you’ll be eligible for any of the above grants, knowing the facts could help you give your child more money — especially in today’s low-rate environment. TD’s refusal to invest A-CESG, ACES, or CLB money in more productive assets disproportionately and adversely impacts low-income people (because these folks are the intended beneficiaries of such programs).
I called TD to verify the issues reported by Delander. I asked whether I could put RESP money into TD e-Series funds, as well as resulting CESG funds. The answer was “yes” (although I’d need to do it for myself, since e-Series funds are self-directed). Then I asked whether I could do the same with A-CESG money or CLB money and the answer was a clear “no”. I asked why. She said that TD’s computer systems were simply not set up to accommodate those grant programs and no programmer had been assigned to fix the issue. She was clear: there is no law or regulation that stopped the bank from investing ACES, A-CESG, or CLB money, but TD has no plan to implement a fix.
What annoys me the absolute most in customer service battles is when a company isn’t clear or honest. But, in this situation, TD has by all accounts met a high threshold of forthrightness. They were straightforward with me on the phone — I got all the unequivocal answers from the first person I talked to. She didn’t even put me on hold. They sent Delander a polite letter that — in my opinion — explained the situation well. I don’t think anybody is being given the proverbial runaround by TD. (As you know, I not only welcome but encourage contradictory evidence so feel free to comment or email me if you’ve had a more problematic experience.)
In my discussion with Delander, he also brought me his investment strategy. Frankly, I think it’s poor. His original plan was not to take advantage of the bank’s impressive, low-MER e-Series Index Funds in his TD Canada Trust RESP account. He was going to use the TD Canadian Index and TD Canadian Bond mutual funds which have MERs of 0.88% and 1.11%, respectively. The new plan is to move the money to RBC and invest in mutual funds over there. I’m pretty certain they don’t even offer anything nearly as good as the TD e-Series index funds. Delander’s heart is in the right place — he wants all the money working for his grandchild’s benefit. But it’s non-nonsensical to worry about putting a small portion of the total RESP money (the A-CESG, ACES, and CLB money) into the markets while ignoring massive fees that could eat a huge portion of the RESP’s returns every year.
I’ve encouraged him to look at whether Questrade could meet his needs (with the critical disclaimer that he should make sure he has enough assets to meet their low minimum and therefore avoid the quarterly fee). As for actual investments, I don’t give advice — but I can share what I would do: I’d buy Vanguard ETFs like the MSCI Canada Index, ticker VCE.TO (disclosure: I own VCE.TO shares) with its MER of just 0.15%. In 18 years, a diversified portfolio of low-MER ETFs will likely have produced attractive income and capital gains. That’s how I would bet Cat’s college fund.
In the end, I think a financial institution should be free to offer the products and services it wants to offer. But the argument that that this TD Canada Trust RESP policy is a systemic discriminatory barrier to low-income people is correct. It excludes RESP programs specifically targeted at low-income earners. Shouldn’t we let them maximize the returns on government money contributed toward their kids’ educations?
Worrying about TD’s policy is a waste of time and shifting to RBC could prove a waste of money. Delander: please don’t focus on a false dichotomy. Move to Questrade and get $50 in free trades.
I’m personally uneasy that the timeline for an RESP is long enough to justify investing in equities. I’ve kind of ignored it by putting some into equities/index funds and leaving some in bonds. Still, I remain nervous that it’s a poor choice that can backfire.
If you’re investing when a child is born, you’ve got a good 18 years. Can you lose money? Absolutely, it’s a financial market. But 18 years is definitely a “long” time horizon. If a child is older than 8, then I wouldn’t be comfortable putting much RESP money into the markets; less than 10 years starts to push my risk limits (for a college fund) — there are definitely examples of bear cycles lasting 10 years.
Read this post and subsequent comments (A TD rep confirms this policy and I think your ‘Delander’ leaves a comment at the end) – http://www.boomerandecho.com/resp-account-getting-started/
I came to the same conclusion you did – TD e-Series funds are cheaper and far superior to anything offered by the other big 5 banks. It’s fine now that I’ve got the e-Series funds set up with regular contributions going forward.
I still have that GIC account with the ACES grant (plus about a year’s worth of contributions), which is required in order to receive future ACES grants before my daughters turn 15. It’s not worth the hassle to do anything with such a small amount.
Yes, exactly, I tried not to run an alarmist piece simply because the amounts involved are so small — but on a grander scale, this is a lot of money being forced to sit outside the market and a lot of it (CLB and A-CESG) is for kids in lower income families. For all the time TD spends explaining their policy, you’d think they could just setup the programming so people could invest the money. What I don’t understand and I hope it came through in the piece is Delander’s eagerness to take that extra $1k+ and put it in a high-MER mutual fund when there are cheaper, equally simple options available, e.g. through Questrade.
Not to throw the baby out with the bathwater, but I’m not sure if the additional fees on generic bank mutual funds compared to e-Series are worth it to get slightly higher returns on $1000. I can understand that TD isn’t exactly overwhelmed with low income albertans clamoring for access to the full spectrum of low-MER index funds so they can design a mathematically optimal asset allocation, but I can’t understand why a simple index fund has to have fees of 1% or more. Oh yeah, I guess they have to pay someone to give you a sad-puppy-dog look when you close your account.
As soon as you plan to have a bond portion in the asset allocation this can count towards it. If you make maximum contributions for 4 years, the contributions + CESG will be worth 12x as much as the portion that’s restricted to deposits. Paying 0.5% in extra fees on the main part would be equivalent to giving up a 6% return on those additional grants. Even if the parents are managing the main contributions and you’re only seeing the additional grants, they can find worthwhile options (starts with an “e” and ends with a “series”) but then you would probably be in a separate account to begin with.
If you can’t put the money in e-Series funds, a more likely alternative seems to be anything that gives you access to ETFs, especially since 2 out of the 3 additional grants seem to have a big up-front component that doesn’t require ongoing contributions. If you qualify based on your personal assets you could go for the lower commission tier at TD Waterhouse.
“I guess they have to pay someone to give you a sad-puppy-dog look when you close your account.” that quote made me lol, awesome
I think the best option is to go for Questrade — $50 in free trades would render moot the purchasing costs. If the TD mutual funds are an index fund, then he’s massively overpaying on MERs (in the order of 0.5% to 0.9% a year) compared to buying Vanguard ETFs. If they’re actively managed then, in the long run, they’re unlikely to outperform the market. Either way, fees in the garbage bin when they should be in his grandchild’s college fund.
VI brings up a great point about asset allocation. I haven’t bothered to set up the bond component of the e-series funds because I’ve got that covered off in the GIC account. Instead, I just split evenly between Cdn, US and International equities.
That is actually smart. And although I’m sure short-term TD GICs pay pitiful rates, their performance as fixed income investments may become more attractive if interest rates go up — especially since bond funds would take a hit.
Hey JW,
You highlighted three additional RESP options in your post: two for low income earners and another provided by a province that used its oil wealth to benefit its residents. You go on to say your daughter is ineligible because Canada punishes wealth (that, and you don’t live in Alberta).
I don’t see how the two are related i.e. how two programs for low-income earners equates to punishing wealth. If you earn more, you don’t need the help…isn’t that the point?
Obviously I’d prefer to bring this up in person because I don’t like the tendency for internet conversations to be misunderstood, but you’ve been fair on my other replies. Anyways, I’d be interested to understand your point of view here.
On the Albertan oil front, I think we need a more national view when it comes to resource wealth, ala Statoil. However, it’s easier for Norway being a much smaller country and likely untainted by the inherent conflicts Canada still faces due to Confederation, but I digress.
Oh it’s fine, I love debating!
In Canada, a person like me (and probably you) pays a good 50% of our income in taxes after adding it all up — fed/provincial income taxes, HST, property taxes, gas taxes and special eco-fees… it all adds up. I don’t make all *that* much. Our gross income only breaks 100k (when I’m not on just EI, which now that I am it’s lower). Yet in Canada we’re considered “haves”. Every subsidy dollar Cat doesn’t get is a dollar frankly taken from her, because it’s money I can’t afford to simply replace. Then when it comes time for school, if she doesn’t manage to get a full scholarship like I did, OSAP *EXPECTS* that –I– will have to foot the bill and will claw all support from her (e.g. give her NO loan money). So she gets stolen from on BOTH ends so families where only $60k gets earned, and where taxes paid are much lower etc, they can get these sorts of exceptional subsidies. Well, I guess it’s an insurance policy: she won’t be able to afford a stupid 4-year BA, so she’ll have to go to Trade School. Thanks Dolton McGuilty and Stealin Harper. Both Fiberals; one wears the Lieberal brand proudly, the other is only a secret socialist, letting the Elfin Deity F prime the housing bubble and ensure billions will flow from taxpayers to banks by way of the CMHC. Subsidies, taxes, and government policies always have unintended, and often perverse, consequences.
When it comes to Alberta oil: AB joined Confederation in 1905. For 80% of their history they were a have-not province built by Ontario. Subsidies and transfer payments out the wazoo. Ontario was sending up to $30 billion A YEAR in transfer payments until the other provinces finally killed the goose that laid the golden egg. Now Alberta and other provinces have managed to exempt oil revenue from the equation, effectively taking Ontario’s money for decades and failing to repay anything in kind. Add to this the shame of the fact that AB and NFLD have become have-provinces by sucking oil out of the ground and often destroying the environment, rather than actually adding any real value, and you realize that Canada has actually become colonized by China, with whom we’ve hopped in bed and to whom we’re selling resource companies. (It’s really mercantilism if you think about it — we give them resources, they process and sell crap back to us). I agree we need a more national view on oil, but AB’s actions have always been Alberta FIRST, Canada LAST. And Ontario gets left out in the cold. We’re a “have not” province but, because other provinces get oil revenue exempted, only just. Like we got a few hundred mil. Nothing compared to what we poured into Canada and now that we’re broke, we’re on our own. Confederation is a joke.
Most of the bank brokerages have only started being able to handle the Canada Learning Bond and the Alberta government grants quite recently. When we checked into it three years ago, for example, BMO said if you created a self-directed account you would have to forfeit any CLB or ACES. You couldn’t even just keep it in a regular BMO RESP and transfer only the CESG and the contributions to an InvestorLine account. You had to give the grants back to the respective governments. (That’s been changed now.)
I’m not surprised TD hasn’t figured out a way to program it yet. While we’d like to think computer programs are dead simple to code, most of those dinosaur ones aren’t. It can be really nasty to have to create a new field (in this case 3 new fields) and follow the strands from that programming through the entire bowl of spaghetti without breaking or tangling anything. They’ve taken a quick and dirty approach by setting up the fields, but limiting what you can do with the contents of them. I suspect they won’t keep working on the programming unless they get a LOT of customers using both of those grants and demanding changes. After all there’s lots of people with 250k$+ investment accounts whining they want improvements to their part of the platform or they’re walking, too.
I’d also add a word of caution. Those grants all have to be paid back proportionately to the withdrawal if a withdrawal is made before the child starts an educational program.
If the money is in a GIC or savings account deposit, then no contribution money would ever have to be used to pay back the government. But if the money is invested in equities that drop in value, and a withdrawal is made, then contribution money will have to be used to make up the shortfall.
E.g. Say someone with a low income in Alberta contributes $10000 to an RESP over 8 years. Say it gets the $2000 CESG and the $800 A-CESG, and $1200 CLB and $500 ACES. That’s $4500 in grant money. If all of the money is invested in equities that drop 10% and they have to suddenly pull out all $10000 for a family emergency, then they would have to pay $450 of their own contributions to the government to make up the shortfall. They would only get $8550 of their own money back.
Now admittedly, you’re not supposed to take the money out except for education purposes. But you’re also not supposed to take RRSP money out except for retirement. So it can happen.
Keeping the grant monies in a totally safe investment might cost some growth, but it might also reduce some risk if there is a high likelihood of having to collapse the RESP for non-educational reasons.
It would be interesting to see if the other brokerages allow full investment of all of the grant monies. It would also be interesting to know what kind of segregation and/or reporting they do on the different types of money being invested. Maybe there’s an article there, somewhere, too.
Interesting read for the day!
The repayment issue is a huge detractor from putting money in the market, especially for low income families targeted by the program. Of course, the exceptionally high fees ON TOP of market risk would make me way more nervous than sticking the money in an Index Fund for 18 years.