If a rogue bill introduced by a Toronto-area Liberal MP continues with its current momentum, Canadians could be looking at a further tax break when saving for their kids’ education.

A private member’s bill quietly passed through the House of Commons Wednesday evening to the surprise of virtually everyone in the financial planning industry.

The bill, if passed into law, would allow parents to contribute up to $5,000 annually to a Registered Education Savings Plan (RESP) for each child, and deduct the amount from their income taxes in the same way they would an RRSP.

“The whole industry is sort of up in arms trying to figure out what this means and what the implications are and how this would play into financial planning, looking at RESPs instead of RRSPs,” said Jamie Golombek, vice president of taxation and estate planning for AIM Funds Management Inc. in Toronto.

Liberal MP Dan McTeague first introduced the bill almost two years ago and the industry has been watching it make its way through the lawmaking process. “Everyone was sort of shocked that this thing actually made it through the House,” said Golombek. “A lot of these private member’s bill don’t survive beyond the committee in second reading.”

The bill’s success in the House comes just two weeks after the federal government tabled its 2008 budget, which included the new tax-free savings account (TFSA). The TFSA, which will become available in 2009, allows Canadians a separate $5000 account for their savings, in which funds are taxed as they go in and any income earned in the account is tax-free.

February’s budget also included changes to the time limits for RESP contributions and withdrawals, an attempt to address students entering school later or staying in longer.

But McTeague’s bill, if passed into law, could mean some big tax savings for Canadians. It would give parents a tax-break of $5000 per child, per year. The current $50,000 lifetime RESP limit would still apply.

Under current RESP rules, contributions to RESPs are not tax deductible but anything earned inside the accounts grows tax-free. As well, the federal government matches 20% of contributions, up to $500 per year to a maximum of $7,200, with a grant program.

As it stands now the grant program would remain if the bill becomes law. “Theoretically the grant option is untouched but one wonders whether the government is going to actually come up with the money to be able to do both,” said Golombek. “The government may have to look at cutting back on one of them.”

Golombek says the intention of the bill is that if a student uses the money, it will be taxed at the student’s rate when it is removed, but if the child does not attend school, it will be taxed back to the original contributor (a parent). He notes, however, that the legislation as it reads today, is not one hundred per cent clear on this issue.

This murkiness in the language allows for different interpretations, agrees Murray Pituley, a senior specialist for taxation with the Regina office of Investors Group Financial Services Inc. “If I set up an RRSP for myself and made a withdrawal it would be taxed in my hands,” he said. “But with the wording that they’ve put in place, there’s certainly some disagreement as to how the tax withdrawal [for an RESP] will be treated.”

He says this distinction is key to the level of benefits some Canadians might receive. For example, Pituley added, if a parent contributes to an RESP early in their child’s life, they may be in a lower tax bracket than they would be later in life when the child enters university. In this case, they would have received only a minor break on the deduction for the original contribution, but would have to pay a higher tax upon withdrawal if the legislation requires the funds to be taxed in the contributors, rather than the student’s hands.

“We certainly have a number of issues to be clarified if it does go into play,” said Pituley. “What we’ve got is something that’s come through very quickly and in this case we’ve got relatively few words in the whole document,” he added. “What we’ve got is not yet legislation and very clearly it may never be or it might be changed between now and when it gets implemented.”

@page_break@While the bill has made it through the House, it still has a ways to go as it heads for the Senate. Although the Senate is Liberal-controlled, the government has the option to introduce its own amending legislation to counter the bill.

The department of finance has said it will fight the bill, saying it will cost the government too much and risk the federal surplus.