Terri Williams, director of value-added programs for DundeeWealth Inc. of Toronto, put her daughter Alison on the road to a well-financed retirement by encouraging her to open a registered retirement savings plan before she finished high school.

For two years prior to graduating, Alison worked part-time as a cashier at a neighbourhood grocery store. She diligently filed tax returns for both those years, and built up contribution room of $795 in her RRSP. Like most teenagers, she spent her hard-earned money on the usual things that young people enjoy, not giving much thought to a retirement still 50 years away. But Canadian tax rules allow for an indefinite carry-forward of unused RRSP deductions, and when it came time for Alison to graduate, Williams thought a financial gift from the family that would fill Alison’s allowable RRSP contribution would be the gift that keeps on giving.

Alison is now on her way to building wealth. A one-time contribution of $795 invested in an RRSP could grow to almost $15,000 over 50 years, assuming an average annual return of 6%. Meanwhile, Alison is learning first-hand how an RRSP expands with the magic of compounding, and Williams hopes her daughter will be motivated to continue maximizing her RRSP contributions every year.

“We encourage young people to open an RRSP as soon as they have earned income,” says Lee Anne Davies, head of retirement strategies at Royal Bank of Canada. “When someone starts young, even if they put in small amounts, they can enjoy the luxury of tax-sheltered, compound growth over a long time. And that can add up to a significant sum in retirement.”

Let’s assume Alison attends university and earns money every summer. By the time she reaches age 22, assume she has generated RRSP contribution room of $5,000. Even if she had made no RRSP contribution before this point, if she then contributed the full amount allowable and stayed invested until 65, her original $5,000 (assuming a 6% average annual return) would be worth more than $61,000 — without contributing another cent.

To make an RRSP worthwhile, a minor RRSP holder should have earned enough to allow for an RRSP contribution, based on 18% of income earned in the previous year, and must have filed a tax return with the Canada Revenue Agency. An RRSP can be opened for a minor at any age, provided the minor has a social insurance number.

Many financial services institutions require a parent or legal guardian to sign the RRSP account agreement, as the signature of a child on a contract is not legally binding; often, an indemnification form must be signed by an adult as well, accepting responsibility for any transactions executed by the minor.

Although some banks restrict the investments available in a minor’s RRSP to less risky, deposit-type instruments, many securities firms and mutual fund dealers allow access to a variety of investment products with the potential to generate long-term growth, including equity and fixed-income mutual funds. The key is to get the money invested and get it working. The minor does not need to claim the tax deduction right away, and can wait until a later date — there is no time limit — when he or she is in a higher tax bracket.

“At least file the tax return, officially report the income recorded and build the RRSP contribution room, whether the child contributes to the RRSP immediately or not,” says Rick Claydon, a financial advisor and partner with Stonegate Private Counsel LP in Toronto. “Don’t lose the [contribution] room by failing to report the income.”

There are lots of ways that kids earn income, and unless they exceed the basic personal amount of $10,320, they won’t be paying taxes. Even if they are self-employed, doing jobs such as mowing lawns, babysitting or caddying at the golf course, this income starts to create RRSP room as soon as it is recorded on a tax return.

“It must be legitimately earned income, not just an allowance,” says Jamie Golombek, managing director of tax and estate planning for Canadian Imperial Bank of Commerce’s private wealth-management division. “It’s important to do a little record-keeping, either by keeping a logbook or hanging on to receipts.”

If a parent owns a business, this is an opportunity to pay his or her child a salary for services provided, as well as for the parent to take advantage of income-splitting opportunities. The salary paid must be equivalent to what a stranger would be paid for doing the same work.

@page_break@“The amount paid to a child must be in line with the work performed and the child’s capabilities,” adds Tina Tehranchian, certified financial planner and branch manager for Assante Capital Management Ltd. in Richmond Hill, Ont. “You can’t pay $60,000 a year to a seven-year old.”

Carol Bezaire, vice president of tax and estate planning for Toronto-based Mackenzie Financial Corp., says that even if some teenagers are motivated to work, getting them to save can be a challenge. However, the funds that go into a minor’s RRSP don’t have to be specifically sourced from their employment income. The money for the RRSP could be received as a gift, inheritance or bonus, as long as the minor earned the legitimate employment income that is the key to establishing the allowable RRSP contribution amount. Bezaire encouraged her nephew to open an RRSP when he was 16 and began earning money, and she made a point of showing him the recognizable names that were held in his mutual fund portfolios. It was motivating for him to realize he owned a part of companies such as Sony Corp., she says, as he was familiar with its products.

“It’s important that kids understand they are building the money for their own future,” says Bezaire. “Aside from saving for retirement, they could withdraw part of their RRSP money penalty-free at a later date for education or putting toward their first home.” IE