Tuition Savings Strategies for Business Owners

Tuition Savings Strategies for Business Owners

No matter how you slice it, paying for college or university tuition is costly. A 2018 survey of 23,000 students by MacLeans Magazine put the average annual cost of college or university at close to $20,000. For families with young children, the cost will only get higher. A BMO Wealth Institute study estimates that the cost of a four-year degree program for a child born in 2013 will be $140,000. For a family with multiple children, the cost of providing for their education could soon be like paying off a second mortgage, but in fewer years.

Business owners used to have several tax efficient ways to pay for their children’s post-secondary education. Due to recent tax reform, some of the planning has been eliminated, however there are still several ways that business owners can save and pay for post-secondary education, even if they are a little more complicated.

Dividends debunked

In some cases, college-aged children are no-longer able to receive dividends from a parent’s company. Now, in order to qualify to receive dividends from an active operating business, children between the ages of 18-24 must be actively and continuously working in the business on a factual basis or 20 hours per week throughout the year. This can be very tough to accomplish for a full-time student, however a part-time student may be able to meet these criteria. These rules are slightly different for an inactive company (think passive real estate or an investment holding company as examples) and should be discussed with your advisor for an potential planning opportunities.

Once a child turns 25, the rules around paying dividends to children from an active operating company are less strict and we can look at options of having them own some of the shares of the company. If your child is pursuing a lengthy post-graduate degree, or is starting college or university a few years after high school, there may be an opportunity to pay for some of the cost through dividends.

Put the kids on the payroll

While dividends may not be an option, employing your children in the business can provide business owners with a way to help fund their education. The work must be legitimate and properly documented and the salary must reasonably reflect fair market value.

This option provides parents with flexibility on the number of hours worked and the job the student will undertake. In some instances, new roles have been created for the child, which has allowed parents to invest in their business at low financial risk while also providing the company with a tax deduction for the salary. Some business owners also like this idea as it gives their children the chance to see first-hand if they have an interest in taking over the business one day. Part-time work during the school year can be used to supplement income, and students can work remotely, depending on their role and the nature of the business.

Capital dividend account

For some private companies, there may the option of using the capital dividend account to pay for tuition. When a company has capital gains, the non-taxable half of the capital gains go into a capital dividend account that is tracked annually. This account can then be utilized, as a tax-free way to fund post-secondary education.

Have the business pay tuition

One seldom-used option is to have the company pay the child’s tuition directly. It sounds great, but there are two catches. Firstly, the area of study must align with the core business. For example, the owners of an engineering firm could have the company pay for their child’s tuition if they are enrolled in a university engineering program. Secondly, the benefit of tuition must also be available to other employees, and there needs to be a suitable case for why other employees did or did not qualify for the free tuition.

Life Insurance

Many business owners use permanent life insurance policies as part of their tax & estate planning strategies. If sufficient funds have been built up in the policy, a business owner may be able to take out a loan against the policy to pay for tuition; this approach can be an effective way to release tax-free money from the company. Parents with term life insurance cannot use their policy in the same way. There are some more complex rules around this area and professional advice should be sought before utilizing this strategy.


RESPs are a very worthwhile tool thanks to the grants provided by the Government of Canada. To take full advantage of these grants, savings for college or university need to start when the child is young. Each year you contribute, the government will match 20% of contributions, up to $500. Over the life-span of the RESP, the government will contribute a maximum of $7,200 per child.

Once you have maxed out your contributions to the RESP, you can consider adding any additional funds to a Tax Free Savings Account (TFSA). Any funds being set aside for tuition will have to go into a parent’s TFSA accounts, as children are not eligible to have a TFSA until they turn 18. Waiting until the child reaches 18 will leave little time for the annual contributions to grow before a standard post-high school diploma is complete. However, if a child plans on pursuing a post-graduate degree, there may be a benefit to them opening a TFSA when they turn 18 and then accessing the funds a few years later.

Trust Funds

If there are sufficient funds available, setting up a trust to fund a child’s education is also an option. For the trust to work, a parent must make a loan to the trust. Annual earnings from the trust must be sufficient to pay interest on the loan, fund the child’s education expenses, and pay tax on the earnings. The current CRA prescribed interest rate that must be charged and paid back to the parents is 3%. Trusts have set up and annual costs, so to be worthwhile, they need to be funded with a significant loan.

One more thing…tax returns!

All students should file a tax return, even if they have little income. By filing a tax return, they will be able to transfer the tuition tax credit to their parents (assuming the parents have paid the tuition). Filing a tax return also starts the process of building contribution room in an RRSP and can also give the student access to the GST tax credit and the Ontario Trillium benefit.

The age of a business owner’s child/children will have a big impact on the best approach to saving and paying for college or university. To talk through the best options for you and your family, please contact one of the experienced accountants and tax planners at GGFL.

This article was originally published in August, 2019. It was updated in September 2022.


Read our recent articles

For your business and personal finances.


The Bare Facts on The New Bare Trust Reporting Requirements

BREAKING: Relief for Taxpayers as CRA Cancels Bare Trust Filing Requirements for 2023. CRA announced… Read more


New Reporting Requirements For Trusts

Each tax season brings the enforcement of tax changes announced in the previous year. This… Read more


CRA Imposes Penalty for Cheques

If writing a cheque is your preferred method of paying CRA, you might want to… Read more


Let’s Connect

Reach out today to discover the
opportunities behind your numbers

Contact Us