Tax tips for students

Trying to help students out during tax time is not the most productive use of time from a practice profitability point of view, but the effort spent serving your client’s children can pay dividends down the road.

H&R Block Canada released a sheet of tax tips for students this morning, listing different facts and strategies that can be useful in preparing tax advice for the whole family.

General tax tips

The company recommends that students turning 19 before April 1, 2007 should file a tax return, even if they had no income, in order to collect the GST/HST credit for the first payment period following their birthday.

Ontario students who are 16 years old or older and no longer living at home are entitled to the $100 Ontario Sales Tax Credit.

The T2202A tax slip issued by the school for the amount of tuition paid in 2005 allows students to claim tuition and education amounts to reduce their tax payable to zero. Any amount remaining may be carried forward for use in another year or may be transferred to a spouse, parent or grandparent.

Accommodation

Students in Ontario may claim a tax credit for their rent while away from home. Students living in a dormitory or residences operated by the school may not claim the full credit. If they move more than 40 kilometers to attend a post secondary institution full time, they may also claim moving expenses against any taxable scholarship, fellowship or bursary income. Deductible expenses include travel, transportation, storage and the cost of meals and temporary accommodation for up to 15 days.

The first $3,000 of an entry-level scholarship is tax free for full time students if they qualify for the full-time education amount. The Canada Customs and Revenue Agency (CRA) says to qualify for the full-time education amount, the student must have been enrolled in a qualifying educational program as a full-time student. These programs last at least three consecutive weeks and also require that each student spend at least 10 hours per week, excluding study time, on instruction or work in the program.

Interest on government student loans is deductible if some of the loan is repaid during the year. Loans and lines of credit outside of the government program are not deductible. Similarly, textbooks, computers, computer accessories, software, supplies and other miscellaneous items are not deductible, even if required for the student’s studies.

Graham McWaters, speaker and co-author of The Canadian Retirement Guide and The Canadian Student Financial Survival Guide, says these tips are useful, but he points out that student incomes are generally so low that any related tax bills are bound to be relatively negligible.

The advice, however, can be a useful tool if your goal is to ultimately service the whole family. It can also be a useful step in starting discussions to encourage parents to set up RESPs for the student’s younger siblings.

“I think parents are the ones that should be looking for the tax breaks and the tax advantages,” he says. “One of the ways to do it, is not to use your open funds or your RRSPs or your home equity to pay for your children’s education, but to start planning earlier with the RESP so that when the kids take the money out they get taxed at their rate, not their parents rate.”

In funding a child’s education, he says there are a number of routes that parents explore to come up with the money. Among them, he says clients will liquidate their mutual fund holdings and pay the 50% capital gains taxes, they’ll draw on their RRSPs and incur the related income taxes, and some will even go for financing using their home’s equity to make up the loss.

“A lot of people aren’t taking advantage of the RESPs. There’s no doubt,” he says. “Most people do not plan for their children’s education expenses early enough and they end up getting caught having to dip into different resources. But, if they plan early enough and start off on the right foot by putting away so much each year, and getting the Canada Education Savings Grants (CESGs), by doing it in advance and early, that can build and grow. Then, tax-wise, when the children go to take it out they’re going to be taxed at a lower rate.”

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com