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.