If you’re like most parents I talk to, you’ve probably had “Open a TFSA for the baby” on your to-do list since the day you got home from the hospital. We’ve been told for years that the Tax-Free Savings Account (TFSA) is the ultimate Canadian gold standard for saving money.
But there’s a massive catch that most people don’t realize until they walk into a bank: your child can’t actually have one.
So, if you can’t use a TFSA, where do you put the money you’re setting aside for your child’s future? You’ve likely started seeing ads for something called a “Child Plan TM ” Today, we’re going to sit down and look at what that actually is, how it compares to the savings tools you already know, and why it might actually be the “secret weapon” for your child’s financial future.
The TFSA Truth: Why You Can’t Open One for Your Kid Just Yet
Let’s clear up the biggest misconception first. I see parents searching for a “tax free savings account for child” every single day. It makes sense—you want tax-free growth.
The age limit: Why a tax-free savings account for your child has to wait until they’re 18
In Canada, you must be the age of majority to open a TFSA. That means your child cannot have their own TFSA until they turn 18.
As a parent, you could technically use your own TFSA contribution room to save for them, but that creates two problems:
1. You’re using up your own retirement or emergency space.
2. If you’ve already maxed out your TFSA, you have nowhere else to go but a taxable account where the government takes a cut of the interest every year.
What is the “Child Plan” everyone is talking about instead?
Since a TFSA isn’t an option for a five-year-old, many Canadian families are turning to a Child Plan. In plain English, a “Child Plan” is a specialized form of Cash Value Whole Life Insurance Plan.
Wait! Don’t let the word “insurance” bore you or freak you out. While it does provide life insurance, the reason parents love it isn’t for the “death benefit”— it’s for the “living benefit.” The cash value. It’s essentially a high-interest, tax-free savings vault that you can open for a child as young as 14 days old. And from the day you open it. Your child will receive a tax-free dividend from the life insurance company for life which they can use for education or any financial need in life without any restrictions.
Life Insurance vs. Savings Accounts: Which Is the Best Way to Save for Your Baby in Canada?
When you put money in a standard bank savings account for your kid, the bank wins. They give you a tiny bit of interest, and then you (or the child) might even have to pay tax on that interest.
However, it’s important your aware that the account you open is called an informal trust or custodial account. In English that means you control the account, but only until your child is 18. At 18 your child is a legal adult and can now take control of the account and access the cash you worked so hard to save without your input or control. As of the day they turn 18, the account belongs to them.
How a “Child Plan ” works like a tax-free vault for their future
A “Child Plan” is different. “Child Plan” is a Participating whole life insurance plan. That means who ever owns the plan “participates” in the profits of the life insurance company.
And every year when the life insurance company make a profit, they distribute the profit to the policy owner. This process is repeated every year for your child’s entire life.
Every time the life insurance deposits the profits into your child’s Cash Value account it is tax-free and their “Cash Value” account will grow tax-free every single year, guaranteed.
In other words, this is your baby’s TFSA, with life insurance to boost.
Because it sits inside a life insurance policy, it grows tax-free. This means the government doesn’t take a bite out of the dividend that’s deposited or the growth every year like they do with a regular savings or investment account or a GIC. It’s the closest thing to a TFSA that exists for a child under the age of 18.
Why parents are choosing “Child Plan over a standard bank account
Our generation—the 30-to-45 crowd—is naturally skeptical of banks. We watched our parents save in accounts that paid next to nothing in interest for the use of their money.
A “Child Plan” is attractive because it offers something a bank account can’t: Multi-generational wealth with no fees or taxes.
With a bank account, you save, they spend, and it’s gone. With a “Child Plan “, you are building an asset that grows for their entire lives.
If they need money for a house downpayment at age 30, the cash is there. If they don’t touch it, it continues to compound into a massive retirement pension plan or a legacy for when they have kids. Your future generations.
The Financial Perks: Growth, Access, and Keeping the Taxman Away
Let’s get into the nitty-gritty of the “fancy” words you might hear from a financial advisor —and what they actually mean for your wallet.
Is a whole life insurance policy really as “tax-free” as a TFSA?
Technically, it’s “tax-sheltered,” but for most families, it functions just like a TFSA. As long as the money stays in the plan, it grows without being taxed. And when your future generations received the life insurance, the life insurance is paid to them completely tax-free.
When your child grows up and needs to access that money, there are several ways to get it out and some of them are tax-free or very tax-efficiently (like using the policy cash value as collateral for a loan from either the life insurance company or a bank).
This is exactly why wealthy families have used these plans for decades; they just didn’t call them “Child Plans” back then—they called them “private banks.”
Locking in a rate now so they never have to worry about being “uninsurable” later
Here is something a TFSA or a bank account can never do: protect your child’s health. Right now, your child is likely the healthiest they will ever be. By starting a “Child Plan” now, you are locking in their “insurability.” (that means they will qualify for life insurance)
If, heaven forbid, they develop a health condition later in life (like autism, diabetes or a heart condition) that would make insurance expensive or impossible to get, it doesn’t matter. They already have their plan.
You’ve guaranteed that they will always be protected, no matter what.
Passing the Torch: Giving Your Kids a Financial Head Start
One of the biggest questions I get is: “Who owns this thing?”
How (and when) to transfer the plan to your adult child
The beauty of the “Child Plan” is that you are in total control not only when they’re young but even when they become adults.
“Child Plan” is an insurance trust. That means you’re holding the plan in trust for your child and unlike the RESP or the bank or investment account, they do not get automatic control when they turn 18.
You as the parent own the policy. You decide when to transfer it to them. If you don’t feel they are mature enough to manage the funds at 18, you can continue to hold it until you feel they are.
If that’s when they get married or want to buy a home. Then hold onto it until then and it will continue to grow complete tax-free until then.
Once they are an adult—maybe when they graduate university or get their first “real” job—you can transfer the ownership to them. This transfer is typically tax-free. You’re not just handing them a check; you’re handing them a powerful financial engine that is already 20 years down the road.
The 18th Birthday Problem: Making sure they don’t spend their savings all at once
The 18th Birthday Problem: Making sure they don’t spend their savings all at once
We’ve all seen it: a kid turns 18, gets access to a savings account, and suddenly there’s a new car in the driveway and the “education fund” is at zero.
A “Child Plan” helps prevent this. Because it’s a life insurance policy, there is a level of “friction” to getting the money out.
It encourages them to treat it like the long-term asset it is, rather than a “fast-cash” ATM. You can even set up the transfer in a way so you can continue to have a say on whether they can access the cash value. As a parent your first job is protecting your child.
If you don’t feel they’re mature enough at 21 to manage $80,000 then you can continue to hold the plan for their future.
The Verdict: Should You Start a Life Insurance Plan or Wait for a TFSA?
So, back to the original question. Is “Child Plan” a TFSA? No. In many ways, for a child, it’s actually better.
When “Children’s Life Insurance” is the smartest wealth-building move
- A Child Plan is the right move if:
You want to start saving now and don’t want to wait until they are 18. - You want to guarantee they have life insurance for the rest of their lives at a “toddler price.”
- You want a place to put money where the growth is protected from taxes.
- And you want a plan for their future that gives them unlimited flexibility.
When a bank account or school savings plan (RESP) might be the better first step
If your only goal is their education and not concerned about their life past their education. The RESP may be a better choice as long as you know the rules.
- Rule 1 – The RESP is for education purposes only
- Rule 2 – The Government matches 20% of what you deposit, but only to a yearly maximum of $500 as long you deposited $2,500
- Rule 3 – Be aware that the 20% matching CESG (Canada Education Savings Grant) is great but the total maximum grant until the year your child turns 18 is $7,200 if you deposited $36,000. Any growth in the RESP account will have to come from the stock market with its risk and its rewards.
- Rule 4 – For your child to be able access their RESP account, they must select a pre approved university, college or career program that has been approved by the Government of Canada
- Rule 5 – What happens if your child has a scholarship or chooses a different path. You’ll be required to close the RESP account. You can withdraw the funds you put in without taxes (as you paid taxes on it when you earned it) you’ll have to return the CESG grants (even if it’s lost on the stock market) and can only withdraw the growth in the RESP account when your child turns 21. You’ll need to pay any taxes on any growth at that time (in your hands) plus a 20% penalty.
As long as you know the rules you are educated with the facts to be able to make the best decision.
While Canadian parents think the RESP is great, they have big dreams for their child’s future and while they look at an RESP first, many parents find that once they’ve maxed out their RESP, “Child Plan” is the perfect “second bucket” because it can be used for anything — including education, down payment on a home, to start a business or even their own retirement—not just school.
Ready to build a foundation for your child?
Don’t wait for the bank to tell you “no” on a TFSA. You can start a Child Plan TM today and give your child a 18-year head start on their financial life.
Request your personalized Child Plan TM illustration today and see how much of a head start you can give them.