Episode 329 - Optimal Education Savings, Withdrawals, and Asset Allocation

25:03dollars. That's really interesting because it's up to the promoter. It's up to the financial institution to determine whether it's reasonable at the end of the day. It does raise the question though, first of all, what's reasonable? Second of all, if you just happen to have very high investment returns in your RSP and you end up, you have no choice but to withdraw these larger EAPs, what is the consequence if you try to take a$40 ,000 EAP and the limit is 28, you can't generate receipts showing that you spent$40 ,000 for your child's education. I've never seen that happen. I'm just curious as to what consequences there would be.

25:46Can the financial institution say, yeah, sorry, we're not allowing you to withdraw your money because you exceeded the limit that we've set? I don't actually know. That'd be an interesting question to ask somebody that runs one of these programs at a financial institution. If anyone knows, leave a comment. Yeah. And I think CRA can audit these. So even if a financial institution says it's reasonable, CRA does have the right to audit all of these. So even if you took out 40 grand, let's say your financial institution says it's reasonable. In theory, CRA can audit your transaction and then you would have to submit further proof of that.

26:19And then CRA does maintain, I don't know if it's CRA or the ESTC, but they maintain a list of expenses that are considered reasonable versus not reasonable. And so something that's interesting is rent to live on campus. housing is a reasonable expense, but not down payments on property. And this is just with respect to the EAP limit, this taxable limit. So I've actually seen a case where somebody took out the full amount of PSE, their taxable, non-taxable contributions that they've made. And they use that to buy a condo on campus and then charge their child rent using the EAP withdrawals as rent for the condo.

26:53And then when they finished university, they just gifted them the property. So I think there's creative ways around it, but it's a problem that I think very few people will end up facing. And the three of us have never seen a case, I guess, where somebody's needed to make a withdrawal in excess of$28 ,000 per year, I guess, that limit, right? Per year, yeah. Per year, yeah. Yeah, I mean, I think we've come close to that. I mean, it's not that unusual for if you supercharge your RESP and you earn healthy investment returns for 18 years, you could end up with well over$100 ,000 in an RESP, and that might require you to take out$28 ,000 in a year.

27:32That's not an extraordinary amount, but certainly we have never been challenged for taking too large of an EAP. Neither am we. And it can happen when you have multiple kids and then one doesn't go to school. That growth has to be spread out amongst the other children. So that larger amount of growth, the more kids you have. Ben, if two of your kids don't go to school, you're going to have all this excess growth that has to be distributed to the two that do go to school. Yeah. I hope they all go to school. I have a feeling your kids are going to go to school, Ben. I hope so. We'll see. It's also so broad, though.

28:03What qualifies as post-secondary programs? It can be trades. It can be beautician school. There's a huge list of qualifying programs. It's almost anything. The qualifiers of the program has to be at least three weeks in length. So I had a client once and they had a child that was going to take a two-week bartending course. Okay. It was a couple thousand dollar course. It was two weeks in length, but then there was a one-week study period. And then there was a final exam. So from start to finish, from the day you start that program to the day you write the exam is three weeks, even though there's actually two weeks of instruction.

28:35and the SDC maintains a list of qualified educational institutions so if you're ever curious about a program as to whether it would qualify for an RESP withdrawal you can just go look that up and it's not just Canadian institutions by the way you can use this for institutions outside of Canada anyways of course we look it up the bartending school is not on the list of approved schools and I was able to call the SDC and say hey here's the scenario and the program is two weeks but there's a one week study period and then the exam can we make an RESP withdrawal and they approved it. So anytime I get people saying like, oh, well, it's so restrictive.

29:08And like, what if my kid doesn't go to school? I'm like, anything they do to further themselves and any kind of career path is likely to qualify for an RESP withdrawal. Like you just don't really have to worry about it. If they become a rock star and never go to school. Okay. That's one thing, but I've yet to see a scenario where we couldn't find something for them to do for a month to get the RESP money out. Yeah. That's very encouraging. I'm really happy to hear that they're that flexible about what they consider to be post-secondary education. It's not this narrow-minded college or university or that's it.

29:40That's a good story. Okay. Now, thinking about how to withdraw properly or efficiently matters because we have this mix of taxable and non-taxable amounts inside of the account. We have limits on withdrawals, certain limits like we were just discussing. Then we have this issue where once the beneficiary is no longer enrolled, it's much less efficient because you have that penalty tax and the grants have to be paid back. So you really want to get this right. Not to mention stuff like tuition tax credits while the kid's enrolled in school. So what Aaron did in his post here is he looked at a case where an RESP has$50 ,000 of PSE.

30:20So that's$50 ,000 of contributions and$150 ,000 of EAP. That's grants and growth. We've got a$200 ,000 RESP account. Aaron just maps out what should you take out and when and what it's actually looked like. In the fall semester of the first year of enrollment in a qualifying post-secondary educational institution, Aaron shows taking$15 ,000 out as a non-taxable PSE. He's going to put that in the TFSA and the FHSA, the first home savings account of the student. Then he suggests taking out$8 ,000 as an EAP. That's the taxable amount and that's the limit for the first 13 weeks of enrollment. That's going to pay for whatever educational costs and stuff like that.

31:03Then in December of that year, so now 13 weeks have passed, Aaron suggests taking out$20 ,122, which is the balance to get to that EAP threshold, the$28 ,122 for the year. That's it for that year. Then in January, so the first winter semester of the first year, we have$15 ,000 taken out as a PSE again, and that goes again into the TFSA and the FHSA, and then a$28 ,122 EAP or whatever the maximum amount happens to be in that year. And he does the same thing, cycles through a couple more times. Eventually the PSE is all used up. There's a final EAP for the$28 ,122. But then there's an interesting piece at the end where in Aaron's case, there was still a chunk left of EAP.

31:49So the students done their program now, there was still a bunch of EAP left, I think it was$9 ,000 or something that couldn't come out under that$28 ,122 limit. So Aaron's like, okay, well, this is a bit of a problem because now we would have to be able to justify the expense. So in his case, what he does is use it to purchase a vehicle, which would qualify as an excess for an excess EAP withdrawal, as long as the student's using it for transportation to and from school. Interesting little point in there. In Aaron's case, the student ends up, they've paid for a good chunk of their education costs.

32:23They've also got a maxed out FHSA and they've shoveled$35 ,000 into their TFSA. Yeah. I think it's an interesting case and I think it ties into asset allocation for RESPs, which we're going to talk about a little bit later because in this case, a bunch of the money that was in the RESP has now gone into other investment accounts that could be used for long-term investments as opposed to spent on education costs. Yeah. Yeah. It's really interesting. A lot of moving parts in here. I guess the one thing that jumps out to me is that you're contributing to the FHSA, presumably in years where your income is very low, probably don't want to deduct those contributions and carry that deduction room forward.

33:02Yeah, totally. The FHSA for people who aren't familiar is the new first home savings account. So it combines the benefits of RSPs and TFSAs in some ways. So when you contribute to that account, you can use that to reduce your income. Like an RSP, you can contribute to it, but you don't have to use that income deduction in the year you contribute. So down to your point, in those low income years, you probably don't want to use that deduction, carry it forward to a year when you have a higher income, right? The other thing is that limit, that$28 ,122, that's indexed to inflation, I believe. That's one of the few things that is actually indexed to inflation with RESPs.

33:31Because I remember looking at that number a few years ago, and it was something like$24 ,000. So it has obviously gone up and i assume it's indexed to cpi the consumer price index but aaron's example i don't think obviously accounted for growth on any remaining investments or any investment income so there would be like maybe residual income built up in the plan because you're going to leave it in a savings account of some kind maybe as this is happening but on the flip side that eap limit is also going up by inflation each year so very fascinating scenario but then to your point quite complex yeah i sometimes like to start with the simple scenario where you assume that the RESP is just going to be withdrawn in order to pay for school-related costs and not used to fund these other accounts.

34:11And one of the strategies that we will often consider is try to get those EAPs out as early as possible. Obviously, you don't want to load up the student with income that's eventually going to be taxable. But the reason for that is if the child finishes a year or two of school and then drops out and doesn't go back, and we all know this happens frequently, you might end up in a position where you have to pay back those grants and face all of those penalties that we talked about. If you get all the EAPs out and at the end, all you have left is contributions, you can take those out anytime, even if the child no longer is enrolled in school.

34:49And I have seen this happen. I've experienced it with clients. So it's not a zero risk strategy. So I would say as far as possible, up to the limit where you're pretty confident that student's not going to pay any taxes. Get those EAPs out in the first couple of years if you can. Yeah. And not only that, but I mean, I've got clients who have students that enter co-op programs in year three and four, and they make$25 ,000,$30 ,000. So the probability of having other sources of taxable income, I find goes up in the later years of the program. So you want, ideally, from just a pure tax perspective, less EAPs withdrawn in later years than in earlier years, right?

35:25Exactly. Crazy. It's a super interesting topic. There's a few other fun things about RESPs that we didn't cover before we get into some of the other stuff. I mentioned quickly they can be used for qualifying programs outside of Canada. So that's another thing that I find people who are maybe wary or concerned about RESP usage. They don't realize that you can use them for certain educational programs outside the country, which is great. There are over-contribution penalties to be aware of. And this can get hairy when you've got multiple RESPs for one beneficiary. So I've seen cases where grandparents open an RESP for a child for their grandkid, the parents also open one, both are contributing.

35:59The beneficiary is the one that has those limits, that 50 ,000 lifetime limit and the$7 ,200 grant limit is per beneficiary, not per plan. So if you've got multiple RESPs with the same beneficiaries, it's very difficult to strategize properly, to optimize the way that we've explained here. And you can run into situations where you inadvertently over contribute to the plan. So you have to be careful. And if you do there's a one percent penalty per month much like an rsp and a tfsa on any excess contributions the weird difference and i don't know why this is but somebody actually pointed this out to me on twitter last year with a tfsa for example the moment you over contribute to a tfsa the penalty applies for that month so even if it's in there for an hour in theory you have to pay that month's penalty on the tfsa over contribution with an resp that's not the case the resp they actually look at the month end.

36:48So as long as you've withdrawn the excess contribution before the end of the month, which just brought up a really ridiculous strategy that I would never recommend to anybody. But I guess in theory, you could just the second day of the month, invest the money in the RESP, take it out on day 28, not pay the penalty and put it in on the first of the second of the next month. Don't do this. It just occurred to me. Don't try this at home. But for whatever reason, reading the tax forms for RESP over contributions, the wording is such that as long as the excess amount is withdrawn before the end of the month, there's no 1 % penalty.

37:16Just to further complicate things. They've made even the over contributions on this plan different from the rest of registered plans. Yeah. And I think that's it. And I just had that anecdote about the client of mine. They used it for bartending school, which I thought was really interesting. I'll jump in here. You had mentioned Mark about sometimes grandparents will open RISPs for their grandkids. That's a strategy we've been asked about it. I tend to discourage it. And the reason is that unfortunately the chances of a grandparent passing away before their grandchild has completed university is not remote.

37:48And if you are the subscriber of an RESP and you pass away, transferring that asset is not as straightforward as it is for many other account types. And so what I typically suggest in this situation is talk to your child, the parent, and say, we would like to fund an RESP for our grandchildren. We encourage you to open it up and I'll make it a holiday gift or something. You can fund it, but open it up in the parents' name as far as possible. That also solves the problem that you had mentioned about parents and grandparents, perhaps both opening RESPs and accidentally over-contributing. It's much cleaner if the parent is the subscriber, preferably both parents as joint subscribers if possible.

38:32Yeah, that's a great point because unlike other registered plans, RESPs are subject to probate. they go through the will of the subscriber if you have an rsp or tfsa and there's a named successor or named beneficiary it bypasses the estate on death that's not the case with an rsp even though it's also a registered plan and so if you haven't named a successor subscriber to that plan in your will your executor effectively takes ownership over the plan and needs to find somebody to take it over and if there's nobody suitable the executor could just decide to distribute the money pay the penalties and deal with it i haven't seen it happen but it to your point it can get really messy with the estate too.

39:09Yeah. And think about if the grandparent were to pass away, say just before or just after the child is enrolled in post-secondary education, by the time you get all this sorted out, it's quite possible the child being third, fourth year by now, and it's just really messy. So it's so much cleaner if you can just arrange it so that the parents are joint subscribers whenever that's possible. For sure. Could you open a joint account with the grandparents, like the parents and the grandparents that helps solve it? RESP with parents and grandparents? You can have joint subscribers on an RESP, but they have to be spouses.

39:42So this is another interesting point. This has come up with us before we've had clients where the parents are separated and they were joint subscribers. And even though both parents of the beneficiary, they cannot be joint subscribers once they are no longer spouses. So what we had to do was sever it. One parent became the subscriber and they just had an agreement. Fortunately, it was an amicable separation and they were just able to say, okay, your name is on it as the subscriber, but I will be as supportive as I can, contribute some amount for the contributions, et cetera. Interesting. Adds yet another wrinkle into an already fairly complex plan.

40:22Yeah. Well, and I've got one where the parents are divorced, but each of them maintains an RESP for the beneficiary. So it was joint, they separated, but one of the spouses wouldn't give up their control over the RESP or both, I guess. And so there's actually two RESPs, but I only deal with one of the separated spouses. And so I have absolutely no view and neither does she on what's going on in her ex-husband's RESP for their kids. And now the kids are going to university. And so it's becoming very difficult, even for us as advisors, where do we take the money from? Yeah, crazy. How many downstream implications there are with RESP planning and estates and the family law stuff.

40:58One important nugget in there that we can maybe be explicit about is that if you want an RESP account to go to somebody else as opposed to be distributed, it's really important to have a successor subscriber named in your will because that's not something that you can do on the account like with other registered account types. That's something that I've seen missed many times for people who have an RESP and are getting a will done. It's for whatever reason common to be overlooked throughout that process. Asked allocation, do you want to talk about that other? Yeah, no, I think that's good. I think we've probably picked it apart as much as we should for now.

41:33Okay. Right. Yeah. Yeah. Well, Mark, you've made the point a few times. It's not as restrictive as it seems and it's a lot easier to use than it seems and whatever, whatever, but that argument is used. I've seen it used at least in one case when people are trying to recommend permanent insurance instead of an RESP, that flexibility argument is often used where someone will say, don't contribute to an RESP, contribute to a whole life policy because it's whatever. You get tax free growth, which is not true. And then you don't have all these restrictions at the end of the plan, like you do at the RESP.

42:07But yes, there are restrictions on the RESP, but they're not that bad. They're relatively easy to manage. I don't think it's a big deal. We have modeled that recently. Jason Prayer and I, for a project that we're working on, we modeled whole life insurance. You and who, sorry? That joke is so ridiculous. I love it. It's my favorite joke. This guy named Jason Otto, you probably haven't heard of him. Yeah, some guy. We have this project where we're looking at different cases for permanent insurance. One of the ones we looked at is RESP versus whole life policy. Because of the grants mostly, there's just no way that a whole life policy can match an RESP unless you make some extreme assumptions about what happens at the end of the RESP plan.

42:46All of the gains being given back, for example, which obviously wouldn't look very good, but that's not a realistic case either. Anyway, that was just a digression. Asset allocation for RESPs, it's another thing where it's surprisingly complicated for what should be a relatively simple account. We've talked about how the money's got to come out of the RESP for it to be tax efficient in a pretty specific timeframe while the student is enrolled in qualifying post-secondary education. I think one of the things that leads to people doing is thinking about their account's asset allocation as being tied very closely to when their child is going to go to school.

43:23I think that can make sense if the funds in the RESP are going to be completely used to fund education costs. If you need the money in the account and it will be spent and given to an educational institution when the child is enrolled, then sure, it should follow some kind of glide path because you're really matching liabilities with that account. No one liabilities. I mean, that should be the assumption for most people, I think. We're going to talk a little bit about this. If you happen to be quite well off and are well able to fund your kids post-secondary education and are just using the RESP as a tax shelter, then you're right.

44:00But I think it's fair to say that that's not necessarily the majority of people. And for most people who are opening an RESP for the reason that it was presumably intended, I think you should probably go into it with the thought that there should be some kind of glide path where the asset allocation gets more conservative as you approach high school graduation. Yeah. I think that makes sense in general. I just think that it's not the only way to think about it. And in our sample where PWL, we tend to deal with fairly affluent families. The second case where they maybe have other wealth or income to fund education costs, then the asset allocation doesn't necessarily need to be directly tied to the education costs.

44:40But I agreed. In a general case for the average person, yeah, it still makes sense. Justin Bender at PWL has a great post on this where he just shows walking through that glide path where your RESP starts out at 90 % equity and then it decreases incrementally shifting into bonds and then eventually shifting into cash in the years before the students enrolled. I think that makes a lot of sense. Then as I mentioned with Aaron's example, in that case, some of the money was going into the TFSA and the FHSA, which depending on what the money is going to be used for, could continue to be in long-term investments.

45:13I think that could change the asset allocation target for the RESP account because again, it's not actually being spent and withdrawn. A little bit more volatility wouldn't be as big of a deal. Yeah. So that's all my thoughts on RESP asset allocation. So in a standard case, would you actually get more conservative year by year? I haven't read Justin's post in quite a while, but does he go year by year? In my mind, I would probably go, without looking at it, 100 % equity up until they're 14 or 15, a few years before I started a glide path. So you wouldn't start a glide path from age five and start getting more conservative at that point.

45:49In Justin's example, that is what he shows, but that's not the only way to do it. I think just conceptually, you're wanting to get more conservative over time. I personally would go more conservative earlier than that, Mark. Our nature, I think, but I don't think it needs to be done on a year-by-year basis. You're 30 % stocks this year and 25 the next year, and I think that's overdoing it. But it's funny because when we talk to clients about this, I tend to not recommend the 100 % stock allocation even early on, or if it is, it's only for the first six or seven years, I wouldn't go all the way to 14, just because especially if they're not front-loading it, if they're going to put in that$50 ,000 when the child's born, maybe.

46:32But if you're just adding$2 ,500 a year plus the grant, your investment returns are not really driving very much at that point because the dollar amounts are so small. It's your contributions and the grants that are really the most important factors. And so if you just use a balanced portfolio is probably the least volatile way to do it. But again, that's just a stylistic thing. I wouldn't argue that that's the only way to do it. Interesting. We talk to clients about risk tolerance and we use a risk tolerance tool that Ben, you and your research team built. But RESPs have always, not confused me, but been an interesting conversation with clients because it's like whose risk tolerance matters the most for the RESP.

47:14And obviously it's the parents, but their timeline is constrained. And at the end of the day, if this really is going to fund the child's education, even though you're the owner of the account and the child's too young to have a risk tolerance per se, but the risk tolerance conversation, which usually is the constraint on how aggressive you can be with the portfolio, becomes really fascinating in those cases. Yeah. The time horizon there is more important than the client's temperament. So I'm triple leveraged NASDAQ in my RESP. Start my glide path early. TQQQ. Although I did find, this is a total digression, but there's a 5X leveraged NASDAQ ETP.

47:49I don't know if it trades in Europe or something. I couldn't find it in Canada, but this thing exists. It's a 5X NASDAQ. That's a good RESP vehicle, I would say. 2 % is RESP. All right. Are you going to allow me to climb on my soapbox for a minute here? Let's do it, Dan. Yeah. Okay. So this was actually one of the genesis of this discussion that we had was I have a number of issues, I think, with RESPs and there's no question they have a lot of benefits. We've just cataloged them. If you're a parent who can afford to contribute to them, you absolutely should. I did for my kids. I don't regret it at all.

48:22The problems I have are just a little bit more about the structure of them and some of the government incentives. So I just want to make a few constructive criticisms and hopefully somebody out there is listening. Let's start with the first one that I hope the objective of the RESP program was to assist families who would otherwise have been unable to afford tuition and therefore increase the number of low-income families who are able to send their kids to school. If that is, in fact, the objective of the program, it's mostly failed. The research seems pretty clear. There's been a number of reports on this.

48:56RESPs are predominantly used by well-off families, most of whom would have probably been able to send their kids to school and assist them financially without the government's help. There's some obvious reasons for that. Obviously, well-off families have more funds available for RESP contributions, but it's not just that. Another reason is that lower-income families may have less financial literacy and they may just simply be unaware of RESPs. They might face barriers to opening the plans. They might be less comfortable dealing with investment firms or banks, and therefore those programs may not be getting to the people who need them the most.

49:36One encouraging thing I was noticing that Ontario has now tried to address this issue by asking parents specifically if they would like to be referred to an RESP provider as part of their newborn registration service. So this is when you have a baby, you apply for the birth certificate and the social insurance number. And at that time, they will offer, if you want, without any sales pressure because they don't have any vested interest, they will introduce you to an RESP promoter, either one that you choose. So you can go to them and say, hey, I would like to open an RESP with such and such an institution.

50:12And the government will then reach out to that financial institution and then invite them to contact you directly. So this is how they put it on their website. It says, you can consent to be contacted by an RESP promoter of your choice to learn about and to start to open an RESP if you decide to, and to request the Canada Learning Bond and or the Canada education savings grant for your child. The service is quick and easy and puts the RESP promoter that you choose in direct contact with you to assist you to start saving early in an RESP for your child's education after high school. I think that's a pretty useful nudge.

50:50I don't know how successful it's been, but I like the idea and I would encourage other provinces to consider the same sort of thing. But I want to look at another issue with RESP accessibility. And Ben, this is one that you touched on in your introduction. And that is that RESP providers are sometimes what are called group RESPs or pooled RESPs. And these include a few different companies, children education funds, Canadian scholarship trusts, heritage education funds. There's a few others. Now, if there is a benefit of one of these plans is that they don't require you to work with an intimidating financial advisor, you know, like Mark or someone here at PWL, and you don't need to have any investment know-how.

51:33You just need to sign up. You subscribe, basically. You make monthly contributions. You get all the bonds and grants that you're eligible for. They do all of that administration for you and they administer the funds. So in theory, that's a benefit. But the problem is these plans have really been widely criticized for being aggressively marketed to new parents. Ben, you mentioned, I've heard these stories for years, of course, of them going into hospital maternity wards and pressuring new parents to sign up. But even more problematic, I think, is the way they're structured because these pool plans are designed so if you subscribe and then you decide for whatever reason to cancel, the penalties are very high and a lot of your money ends up staying in the plan and it subsidizes people who don't dropout.

52:23And not surprisingly, the people who are most likely to drop out after subscribing tend to be low-income families simply because they can't afford to continue the contributions that they had committed to. So here's a paragraph from a report about this problem. It says, redistribution of earnings on contributions from subscribers who exit the plans early to those who stay to maturity is integral to the design of group plan RESPs. There are concerns that low income subscribers may be more likely to exit these plans prior to maturity or prior to their beneficiaries accessing the full complement of payments.

53:03This is a pretty heartbreaking report, I think, because it's like a survival of the fittest approach to education. I mean, this is hardly advances the goal of fairer access to education when it has presumably lower income families contributing, dropping out, not benefiting from it, and then their money going to higher income families who keep subscribing right to maturity. This is a problem for me. I don't like the way that those plans are structured for that reason. All right. So then the next problem with RESPs I want to address is the inadequacy of the incentives for low-income families who participate because there are some promising plans.

53:44We've talked about the Canada Learning Bond, for example. Again, just a reminder, if you're a qualifying low-income family, you can get up to$2 ,000 without making any contributions yourself. You get$500 just for opening the RESP and you get another$100 annually until the child is 15 if you continue to qualify. The government even chips in 25 bucks to help cover the cost of opening the count. So it's lovely, but we can all agree$2 ,000, which by the way, has not increased since 2004, is not even enough to pay for a single semester of an undergraduate program. So I'm not really sure that this meaningly improves the prospects for post-secondary education for any child in a low-income family.

54:29They might open the RESP, they might get a couple of thousand dollars, but that's not likely to make an otherwise unobtainable goal any closer to reality. More than that too, there's a significant obstacle in that receiving the Canada Learning Bond requires you to actually open an RESP. That might sound simple for our listeners, but families with lower financial literacy are going to have more difficulty with this step. It's not necessarily as straightforward as those who are more financially savvy might think. And so there have been critics of the CLB program who have suggested that low-income families would be better served if financial assistance for education wasn't tied specifically to the RESP program.

55:13So there's different ways you could do it. The federal government could deposit the entitlement into some kind of notional account. This could be administered alongside the Canada Child Benefit, which is another income-tested benefit. So there are alternatives. Mark, I did want to say when we were prepping for the show, you had pointed out that in the current federal budget, there was a proposal for something that might help. yeah so this was budget 2024 and starting in 2028-2029 the proposal that all eligible children born in 2024 or later would have an RESP plan automatically opened for them and if they were eligible for the Canada Learning Bond payments that would be automatically deposited into their accounts and I believe it's done or proposed in such a way that if the child attains the age of four and they don't yet have an RESP, then they will automatically open one for them.

56:10So it does step in the right direction for sure. At least it's going to get some of that Canada Learning Bond money that people would otherwise qualify for that they don't know about or they don't have the financial literacy to go and open an account themselves. That will partially solve it. But I mean, there's four years there where they're not going to be getting it. And then those cases, I don't know what institution is going to end up administering all of these. I don't know how that money is going to get invested, if at all. I believe just it'll probably end up sitting in cash or in a savings account of some kind, but at least they are thinking about the concerns that you've raised to some degree down.

56:41Yeah. I mean, these are at least good ideas. We'll see what the execution is actually like. So anyway, so that's the Canada Learning Bond. We've also mentioned that the CESG grants or the standard grants there, the matching grants on your contribution will get topped up for low-income families who have RESPs, but I see this benefit as pretty problematic as well. I mean, so here's how it works. When you contribute$2 ,500 to an RESP, you typically get a grant of 20%,$500. However, lower income families also get what's called additional CESG. So instead of the usual grant of$500, they would get$600.

57:18So again, that's nice, but here's the problem. To qualify for that full top-up, your net family income can't be more than $55 ,867 in 2024, that number changes with inflation. And if your family income is greater than that, but not more than$111 ,733, you still get some additional CESG, but it's only 10%. So on that$2 ,500 contribution, your grant would be$550 instead of$500. If it's over that$111 ,733, you get no additional grants. So it's also important, as Ben pointed out, these additional grants, yes, they can be obtained with smaller contributions if you qualify, but lower income families are not able to collect any more grant money over the life of the RESP.

58:10The maximum lifetime grant any child can receive is still$7 ,200, including the standard amount and the additional CESG. And so that's important. You're not getting any additional money. You're just getting it with lower contributions. These are tens of dollars that we're talking about. To your point, a family with income of say$55 ,000 or even under$111 ,000, they might not be maxing out an RESP. And if they're getting a 10 or 20 % bonus on a$1 ,000 or$1 ,500 contribution up and above the grant that they would already get, we're talking like$30 a year in some cases. It's really meaningless at the end of the day.

58:47Pretty trivial amounts. And even with the trivial benefit, I mean, let's look at these very low income thresholds. Households earning less than$55 ,000 a year cannot be expected to direct any meaningful amount of savings into an RESP. It's very unlikely that they're going to be contributing that$2 ,500 and collecting the whole additional$100 in grants. Most people in Canada, most families are going to have a pretty hard time just paying the rent and putting food on the table at that point. And so you have to be really low income in order to benefit from these. And if you are, you probably don't have$2 ,500 to put into an RESP.

59:27And I mean, at the risk of getting hate mail from seniors, I'm going to put my neck out here and say, the government is removing this very modest benefit from families with a combined income of less than$56 ,000, but it continues to pay old age security benefits to seniors until their individual incomes, not household incomes, exceed$148 ,000 in 2024. So I'm just putting it out there that maybe RESP grants could be calculated on the basis of income and reduced or even eliminated for families who don't need them, but with thresholds that are more in line with those used to claw back old age security.

1:00:09So I don't know. I don't have the answers here, but I'm suggesting that maybe if you earn$200 ,000 a year, you don't get any RESP grant. But if you earn$50 ,000 a year, you get a very generous RESP grant. So then the grant money is going to the families who really need it and not just acting as an additional tax sheltered account for families who don't really need it. Interesting. And your number there on the old age security,$148 ,000, that's the point at which the last dollar of OAS gets clawed back. Exactly. So at that point, you're still getting some OAS. You're not getting the full amount, but yes.

1:00:47Does that number presume you took it at age 65? Yes. I don't think it matters the age you took it. It matters the age you are. So if you're over 75, that threshold goes up because your old age security is 10 % higher. Yeah. I'm just thinking if you defer it, and this is also something that Aaron Hector pointed out to me once upon a time but if you defer it because your oas is higher you can actually have more taxable income before the entire amount gets clawed back because it gets clawed back at 15 cents per dollar so the higher your oas the higher the income you can actually have before it all gets clawed back so my point is that if you were to defer oas that ceiling is not necessarily 148 000 it could be called 160 170 you got a couple that's 340 350 000 of household income and you might still get a penny of old age security.

1:01:32To your point now, people with$55 ,000 of household income are losing this tens of dollars of benefit on their RESP. I mean, come on. It's just a yawning gap, I think, between those two thresholds and something that just really jumps out to me. If you want to get money in the hands of families who need it, and let's face it, RESPs funding education is an investment in the future. It's not just a handout. It's something that benefits everybody to have a more educated populace and workforce. Look, I've spent a lot of time ripping on our ESPs and their flaws. I want to end with some more positive observations because as I said, I love the idea of them.

1:02:10And just because they have some structural limitations, it doesn't mean they're accounts that people should avoid. Let's start with the first one. If you are able to take advantage and you contribute that$2 ,500 annually, and lots of middle-income families can do that and do that on a regular basis, and you max all the government grants, that RESP really does become a pretty significant asset. Even with modest investment returns, it's quite realistic. We see it all the time for parents to save$75 ,000,$80 ,000 or even more by the time their child starts university. And that is likely to cover most of an undergrad degree, I think, depending on what course you take, of course, or whether you live at home or what your needs are for room and board, but that is certainly a very good start.

1:02:55And I have worked with many parents who are really pleased to achieve that goal for their kids. The first time you have a child graduate high school and they look at that RESP and they say, do you think that's going to cover their education? And I'm able to say, yes, if not all of it, certainly the bulk of it. They're very proud of that financial goal and they should be. So they're definitely a boon for people who have the means and the savvy to use them to their full potential. We did for both of our kids. They were a huge help in paying for their education. So I think big picture, they're very useful accounts.

1:03:30I want to say too, I think it's important, even though I've been complaining about how the RESP program has not really improved over the last 20 years or so, this contribution limit is basically the same as it was. That lifetime maximum grant has been$7 ,200, it seems like, forever. There's been no indexation on any of these limits. But I think it's worth noting that one of the reasons for that, and one of the reasons that the government has clearly stopped improving the RESP program, is because governments have introduced other policies that have improved access to education, tuition freezes, more generous financial assistance for low-income families.

1:04:08So they are in many ways doing the right thing. And as a result, Canada actually now leads all G7 countries with almost 60 % of its workforce holding bachelor's degrees or higher. So we are doing a lot of things right. Just not convinced that our ESPs can take too much credit for that. Yeah, that's fair. I think the only thing that I can remember is, was it this budget or last year, they actually increased. We talked about the EAP limit in that first semester of being$8 ,000 for full-time school and 4 ,000 for part-time school. It actually used to be 5 ,000 for full-time and$2 ,500 for part-time.

1:04:41So this isn't really a big deal, but they recently increased the amount that you could take out as a taxable withdrawal during the first 13 weeks. Not a big deal, but it's some minor improvement to the withdrawal plan. Actually, that$5 ,000 limit in the first 13 weeks was pretty limiting. I know that for a lot of times we would have preferred to be able to take more. I think it seems clear to me that the primary reason that that limits there is so people don't game the system by enrolling their child in a program, withdrawing all of the grants and growth, and then dropping out six months later.

1:05:14You could still game the system, but it's just a little harder now with that cap. Yep. Great. Very valid points and criticisms. In my experience, I've never seen a situation where an RESP ended up being a bad tool in hindsight. I think people worry about some of the restrictions that we talked about that are mostly overblown and are concerned about withdrawal strategies and what if their kids don't go to school. I have not once in 15 years come across a scenario where with the client, we looked at the RESP when their kids were about to go to university and went, or even of university age and went, oh boy, like this was a really, really bad idea in hindsight.

1:05:47So I'm just curious if either of you have come across bad experiences with clients in RESPs. I had one that just happened to us last year. Again, this was not something that I think in hindsight, we could look back and said, well, we shouldn't have done it, but we did run into one of the limitations that we couldn't overcome. That was, we opened the RESP for the family. They have two kids. We contributed the max every year. I think we even did the supercharge 14 ,000. And then the family moved out of Canada. Just for the record, you don't have to collapse an RESP if you move out of Canada. But if the child is not a resident of Canada, they cannot claim those benefits.

1:06:28So they said the chances of our kids going to post-secondary school while they're moving back to Canada and becoming a student there was remote. So we just agreed we would have to collapse the RESP and the usual things happen. We got the contribution back. We had to repay the grants to the government. Fine. But then all the growth on the investment, we could not withdraw. And the reason was the plan had not been open for 10 years. you'll remember that one limitation we talked about and because of that we had to just make a donation to a post-secondary education so they were very grateful for the donation no tax receipt was issued so you know worst case scenario they got back their contributions they definitely lost a few years of investment growth it was some opportunity cost i mean what do you do when you ask a family, would you like to open an RESP?

1:07:21Do you think, is there any chance that someday years from now you might move out of the country? Yeah. Or your kids might move out of the country. So hindsight, I don't think there's anything we did wrong, but just to let you know, there can be situations where you end up disappointed that you have to dissolve the plan. Very interesting. All right. I think that's it for our ESPs. Should we go into the after show? Sure. Sounds good.

1:07:50I don't watch any content. Cameron always has content that he talks about. I don't know. Do you guys watch any shows or anything that were good? Shows? No. You guys are like me. Yeah. Who's got time for shows? Cameron does. Did you watch this? I'm like, no, I didn't watch that. He doesn't have young kids anymore. That's why he's got all the time in the world. Yeah, maybe. Okay. No content. That's pretty funny. No, I'm reading a Star Wars book. Oh, okay. Nice. Yeah. Star Wars isn't actually based on a book, but in between two of the movies, I don't remember which ones now, but there was this lull where there was not a lot of Star Wars content coming out.

1:08:25And I think Lucasfilms, their licensing company said, we need to put out some Star Wars stuff, but we're not going to put out a new movie. So they went and found a publisher to find an author to write books in the Star Wars universe. So it's cool because it has all the characters from the original movies. And there's just a totally different timeline and story for them. I can't remember what it's called, Empire to the Throne, something like that. But yeah, I read fantasy novels at night before bed and that's about all the content I consume these days that's not financially related. There you go.

1:08:53That filled the content slot. There you go. Tell me to do it. We got a review here. It's related to Dan, which is nice. It says, thank you, Dan. Wow, it's so refreshing to hear Dan Bortolotti's voice again. The CCP podcast was one of the first pieces of content that got me into sensible financial advice and hearing him again is like a warm, comforting hug. Please don't let him leave. Sorry, Dan, you're stuck. Uh-oh. Well, I always like to be able to offer warm hugs. Super nice. That was the only review though. We always appreciate reviews. We have 1 ,234 ratings on Apple podcasts now, which is, I mean, pretty crazy.

1:09:33I used to think it'd be crazy if we got to a hundred. With an average rating of 4.9 stars, we've got 1 ,200 ratings on Spotify with an average five-star rating. Wow. So if you're listening and have not yet left a review, we would love to hear from you. It's always nice to read those. It really is. I also had someone reach out to me on Twitter. I sent this to you, Dan. They said, hi, Ben. Great work on the Rational Mind Your Podcast. Just wanted to say that Dan is awesome. He really adds value to the podcast. Well-spoken, mature, and sensible. Thank you. Thank you. Also, very nice. I strive to be all of those things.

1:10:06You know, you are listening to some of your comments when we're doing the RESP episode. And it's like, it's a really sensible way to think about that. It comes from, I think, being a background as a communicator, as opposed to in the financial industry. I have a little different perspective to a lot of these things, I think. Sometimes it's helpful and sometimes it resonates with listeners, readers, clients. Yeah. More than sometimes I would estimate, but yeah, I agree. Yeah. That's great. Lots of positive comments for Dan, hey? You got a bunch of positive comments when you started too, Mark. But no longer.

1:10:40All good. These will dissipate very quickly, I'm sure. It's great to have you done it. I think it adds a lot to the conversation for sure. Thank you. It's definitely nice to be back in it for sure. Yeah, no, it's good. Okay, so I did want to comment on this discussion in the rational marketer community that unfolded over the last couple of weeks on expected returns. What is an expected return? What determines expected returns? Do value stocks have higher expected returns? That was a big part of the discussion. it's in the Sunil Wahal episode if people want to check it out when I last checked it was up to 313 posts but that was a while ago it's probably more now I'm not going to go over the whole discussion because some of it's like man just a lot of text walls and walls of text maybe think of that meme I don't know if you guys ever see that meme that's like a screenshot of someone texting and it says I ain't reading all that I'm happy for you though or sorry that happened yeah top five meme that's how I felt trying to keep up with this thread it was just like man And on the weekend too, people are writing these essays.

1:11:35Wow, I'm impressed. I don't mean to be disrespectful of the efforts people put into that conversation, but it's just like, man, it's a lot of text. But anyway, a lot of the discussion was around how cashflow growth affects expected returns. Instead of trying to recount the whole discussion or even give my views on what people were saying, because there's just so much going on in there. What I did is took one post from one community member who I think is generally very, very sensible and well-informed. I'm just going to take some of the points that he made. We linked to an AQR presentation on this topic that shows the price of a stock equals its expected cash flows discounted back to today's dollars at a discount rate that is equal to the expected return.

1:12:18I mean, that's it. That's fundamental asset pricing theory, discounted future cash flows. Then he makes the comment that if two companies, A and B, have the same expected cash flows and company A has a lower price than company B, then company A definitionally, mathematically, it's an equality, has a higher expected return, higher discount rate. That must be true just the way that the math works. Now that's true whether expected cashflow growth is zero for company A and B or if it's 10 % for both companies. Cashflow growth does not affect that. Then he also makes a comment that when cashflow growth gets included in the equation, the stock's price mathematically can be simplified down to expected return equals expected cash flows over price plus expected growth.

1:13:08That's like the Gordon growth model for stock valuation that people may have heard of. And this poster was saying, that's where some of the confusion comes in because now we have growth as one of the terms in the equation. So how does that affect expected returns? So using that same example, if two companies, A and B have the same expected cashflow, and maybe we can put the equation in the video so people can see what I'm talking about because it's probably hard to think about. If two companies A and B have the same expected cash flows, so the same initial cash flow and the same expected cash flow growth into the future, and company A has a lower price than company B, then company A again must have a higher expected return, a higher discount rate, and that's true regardless of the growth assumption.

1:13:48It's the same in both cases. He's basically saying mathematically, it must be true that cash flow growth doesn't somehow magically change expected returns. One of the challenges though, I think, is that in those equations, we're assuming that cash flows and cash flow growth are known quantities, but in reality, it's really hard to disentangle cash flow expectations and discount rates and expected returns when we're looking at stock prices. For example, does Nvidia have a high relative price because of insanely high cash flow expectations and it still has a high discount rate, which is possible, and therefore still a high expected return?

1:14:26Or does it have reasonable cashflow expectations and a really low discount rate, meaning a low expected return? It's really hard to say what's going on there. But then you have papers like Fama and French's, The Anatomy of Value and Growth Stock Returns. It's an older paper, so there's always that this time is different argument, but they break down the average returns of value and growth stocks into dividends and then three sources of capital gain. It's like, where are the returns actually coming from for these different types of stocks? The three sources of capital gain are growth in book equity from earnings retention, convergence in price to book ratios, which is mean reversion.

1:15:03They're coming from mean reversion and profitability and expected returns. Then the third source of capital gains is upward drift in the price to book ratio during the period in their sample. They find that the capital gains of value stocks trace mostly to convergence. So that's price to book rises as some value companies become more profitable and their stocks move to lower expected return groups, like they become growth stocks, for example. Growth in the book value of equity is not meaningful for value portfolios, but is a large positive factor in the capital gains for growth stocks. And then for growth stocks, convergence is negative.

1:15:37So valuation ratios fall because growth companies do not always remain highly profitable with low discount rates. They also showed that in the year after stocks are allocated to value portfolios, growth in book equity is on average minor for large cap stocks and negative for small cap value stocks. It's basically saying that value stocks don't do a lot of equity financed investment. A large average capital gains of value stocks show up as increases in the price to book ratio. And then in contrast, companies invest heavily after they're allocated to growth portfolios. And on average, the growth rate of book equity actually exceeds the growth rate of the stock price.

1:16:15So that means that price to book declines after stocks move to the growth category. And the positive average rates of capital gain of growth portfolios trace back to increases in book equity that more than offset the declines in price to book. As I'm reading this, I realize is probably way too nerdy. We did an episode of this a while ago, but basically there's this convergence that we see in valuations for growth stocks. Once a stock becomes a growth stock, there tends to be a convergence back down to a lower valuation at some point. That has a big impact on the returns of growth stocks. Then it's the opposite for value stocks.

1:16:50Once a stock becomes really cheap, it tends to do a little bit better at some point in the future. and that's one of the reasons that we see historically that there's been a value premium. Yeah, as it relates to expected returns, you look at that, you look at what has happened in the past and you see a stock with a high price and ask that question, does it have a high expected return and really high cash flow expectations or does it have a low expected return and reasonable cash flow expectations? It's still really hard to disentangle that, but I think it is interesting to look at that anatomy of what actually tends to happen with growth stocks, which suggests that they probably don't have high expected returns unless this time is different, unless companies are different now and whatever, whatever.

1:17:31That argument is always there and we can't know, obviously, if this time is different. Anyway, that's it. Expected returns or discount rates, the end. Yeah, but what does this mean for my 5X leverage NASDAQ position? That's all I really care about. I didn't hear anything you just said. Just tell me what to do with it? It probably has a low expected return. This was the point of discussion. This was the point of contention in this community discussion is do high price stocks have low expected returns? The argument is that, well, today's companies, they've got such incredible cashflow expectations because it's a winner take all environment and so on and so forth.

1:18:10So therefore we can have high price stocks that still have high expected returns. Is that true? I mean, if you look at the past, that has not been true. Companies with high prices. Like the long past, but I guess over the 10 years or so, the most recent 10 years, it feels like it. Over the last 10 years, valuations have just gone up. Yeah. So maybe it is different. All right, I'm sticking with my NAS acquisition thing, but thanks for talking me through that. Yep. Perfect. We're sorry that happened to you. Oh, yeah. I felt like I had to say something about that discussion because it became such a thing in the rational minor community.

1:18:48Cool. Yeah, that's it. But we did talk about the anatomy of value and growth stock returns and another related FOMA and French paper called Migration. Both of them just look at why has there historically been a value premium? Why have growth stocks underperformed and value stocks outperformed relatively speaking? When you dig into the actual components of what drove that. So that's episode 140, we talked about that. But I still don't know the answer. Do value stocks have higher expected returns in growth stocks or do the differences in valuations predict differences expected returns when we don't know what cash flows are?

1:19:20It's a pretty interesting question. But there is no answer. No, there's no answer. All right, that's it. As always, let us know what you thought of the episode. It's again, a bit of a different thing where we covered a relatively Canadian topic and talked through some different kinds of stuff. Like Dan's soapbox segment, that's a new thing. I don't do much soapboxing. Thanks for letting me get off the leash on that one. Sorry. it's been a long time. So we were talking after we recorded the last episode about maybe doing a series on the different types of accounts in Canada, like RSPs and tax-free savings accounts and non-registered investment accounts, registered disability savings plans.

1:19:57So again, very, very Canadian content. I'm very curious to hear what listeners think about this episode, because that will probably inform our decision on whether we do deep dives and the other account types as well. Yeah, definitely appreciate the feedback. I've got some other stuff cooking too. I just wrote a video that we can talk about in the podcast too on what's related to actually what we were just talking about. Can you pick winning industries? Can you identify which industry is going to perform well in the future before the fact? Can I? Because I bought marijuana stocks in 2017, so I personally cannot, but.

1:20:28You're hilarious, man. You do all the stuff that the silly average investor does. Most of my portfolio is totally hands-off. You got to scratch the itch a little bit. You got to have some fun. I don't have that itch, but. No, you don't. I know you don't. You're a cyborg. You wouldn't have that itch. I'm glad you do it, I guess. I do it for all of us, Ben. I want to get really crazy. I buy a three-year GIC. Three years. Three years, Dan? Oh my goodness, that is nuts. Wow. Leveraged. 5X.

1:20:59So I'm not sharing that strategy with anybody, though. I'm keeping it to myself. Yeah, I hope you don't get margin called. You've got no liquidity on that, Dan, so. The price doesn't move. I think you're good, right? That's true, yeah. No volatility. I got it figured out. Oh, it's not a market link, GIC, I hope. Nope. Nice. Okay, anyways. All right, I think that's good for the episode. But yeah, I'm repeating myself, but definitely interested in feedback on the topic. We do have some more traditional topics that we can do in future episodes, like picking winning industries. One, I've got something cooking on gold too.

1:21:29There's been some interesting research that's come out on gold since the last time we covered that topic. Working on that, working on a few other things too. All right. All right. Anything else for you guys? That's it. Thanks. Awesome. Thank you.