Budget’s education measures take from the rich, give to the poor

In Tuesday’s federal budget, the Liberals dropped two out of three non-refundable federal education credits, effective January 1, 2017. The tuition tax credit still exists, but the government is nixing the education and textbook amounts in favour of enhancing the Canada Student Grants program.

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The main reason for this move, says the budget, is “to help students cover the cost of education without increasing [their] student debt loads.”

Read: Student debt troubles persist

As of the 2016-17 school year, full-time students in low-income families will be eligible to receive $3,000 per year in grant funds versus $2,000 previously, while full-time students in middle-income families will receive $1,200 per year versus $800. For part-time students, those in the low-income bracket will receive $1,800 versus $1,200.

The Canada Student Grants program defines whether students are low- or middle-income based on where they live, and the size and annual pre-tax earnings of their families. In Alberta, for example, a single adult student who earns $24,601 or less is considered low-income; same with a student who comes from a three-child family that earns $37,654 or less per year. In the same province, a single adult student who earns between $24,602 and $47,486 is considered middle-income; same with a student who comes from a three-family that earns between $37,655 and $79,683 per year. The province with the lowest thresholds is New Brunswick.

Meanwhile, education and textbook credits aren’t awarded based on income. Also, students typically only use the credits after they earn more than the Basic Personal Amount—usually after they graduate.

“Students don’t save much from claiming these two credits,” says Curtis Davis, director of tax and estate planning at Mackenzie Investments. “Instead, students need money while they’re in school and incurring [costs], such as tuition fees.”

Tax savings of education and textbook credits until Dec 31, 2016

Using education amounts collected up until Dec 31, 2016, students can claim a non-refundable credit for each month of study at an accredited institution, whether it’s located in Canada or not. The credit also applies if students are registered in a cooperative or eligible training program. In all cases, they’re able to receive 15% of $400 per month if they’re full-time, or 15% of $120 per month if they’re part-time.

Using textbook amounts collected up until Dec 31, 2016, full-time students can save 15% of $65 for each month they’re registered during the year, while part-time students only save 15% of $20 for each month they’re registered.

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Still, he suggests reminding students and their families that they’ll be able to claim any federal education and textbook credits collected up to December 31, 2016. What’s more, the tuition amount is still available federally and in all provinces except for Ontario, where the government’s proposed to eliminate all education credits. There are currently education tax credits in all provinces.

Davis says, “The credit rates vary by province but are typically based on the lowest provincial tax rate, excluding federal tax rates.” Clients should also know that “provincial tuition credit[s] are based on the province of residence for students, not necessarily the province where their schools are located.

“For example, an Ontario-resident student would be able to claim the federal tuition tax credit and the Ontario provincial tuition credit up to September 5, 2017. When student[s] file their tax returns, they file for the province where their permanent home address is located,” and where their health insurance and driver’s licences are registered.

Read: What eliminating Ontario education tax credits means for clients

Giving to the poor

In the budget, there are also proposals to:

• Expand eligibility for Canada Student Grants for the 2017–18 academic year. No details have been released.
• Allow students to work while studying without impacting the amount they would receive under the grant program. The budget says, “Students would be required to contribute a flat amount each year towards the costs of their education.” And “[estimated] financial assets and student income will no longer be considered” to determine grant eligibility.
• For students who need help paying back their student loans, increase the repayment threshold from $20,210 to $25,000. There are no proposed changes to the types of aid offered to graduates.

The flat-rate contribution measure will primarily help adult learners who already have jobs, says Davis. “This is a good [move] since [there will] now be incentive for students to work. But, the group of students it will really benefit are adult students, who attend classes at night and who are trying to get or finish a degree. For these students, they’ll be able to maintain [grant eligibility] and provide for their families.” The government will work the provinces to develop the flat-rate model, which will start with the 2017-18 school year.

Based on these changes, revisit all tips and savings comparisons you offer clients, says Debbie Pearl-Weinberg, executive director of Tax & Estate Planning for CIBC Wealth Strategies Group.

Read: Get repaid for funding a child’s education

How to help clients

It may be too early to determine whether the budget’s education measures will help families, says Pearl-Weinberg. “One of the reasons the government made these changes is because [the previous measures] weren’t targeted enough based on income level. But, we don’t know what the flat-rate contribution is going to look like. All of the measures work together.”

For now, compare how much a client saves by using education and textbook credits with how much students will receive under the enhanced grant program. “For a full-time student in a low-income family, you’ll be receiving $1,000 more of grant money while losing $558 in tax savings for education and textbooks. That change is good.” Part-time students will also benefit since they’ll be giving up less than $200 in tax savings, but will gain $600 in additional grant money.

In contrast, full-time middle-income students will lose tax savings of $558 while only receiving $400 in grant funds–a net loss.

And, wealthy families can only access the federal tuition tax credit. “There’s the argument that they never needed the assistance to begin with,” says Pearl-Weinberg. So, going forward, work with these families to figure the best ways for them to save for children’s educations.

Davis is optimistic. “The [grant] percentage increase is the same [for all students], but the biggest benefit is definitely going to lower-income families based on the dollar amounts. [Still], if students can get more grants and fewer loans, that will make the next stage of life easier financially. Or, it may make school more affordable for these families and that means more people coming out of school who have the ability to buy houses and cars,” and to save and invest.

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Middle-income families may get more help when the eligibility thresholds for the Canada Student Grants program are expanded, he adds. “I’m assuming these [thresholds] are going to be increased, which means middle-income families may be eligible for more grants than before, while also seeing an increase to grant amounts.”

Also read:

Essential reads on the federal budget

Ontario to test guaranteed minimum income

Will more provinces drop education credits?

Advisors should monitor upcoming provincial budget announcements. Already, all education credits has been cut in Ontario in favour of creating an Ontario Student Grant, effective September 5, 2017, says Curtis Davis of Mackenzie Investments. “There are a lot of similarities between the policy [in Ontario] and the 2016 federal budget. So, other provinces may also review education measures and make changes.”