Little impact if feds drop education credits

The upcoming federal budget may introduce some tax changes for students, similar to the measures that were recently introduced in Ontario’s 2016 budget. The main difference is the Liberals are only expected to eliminate two of three available education credits, versus Ontario’s plan to eliminate all three in favour of a student grant program.

Read: What eliminating Ontario education tax credits means for clients

Currently, on the federal level, “There are three non-refundable tax credits available to students,” says Curtis Davis, director of tax and estate planning at Mackenzie Investments. “These are the tuition tax credit, the education amount and the textbook amount. For the tuition amount, there are no proposed changes,” but the other two credits may be on the chopping block.

This is likely because students don’t save much from claiming these two credits. And, it doesn’t make sense to claim the credits until they earn more than the Basic Personal Amount, which is usually after they graduate. Davis says, “Instead, students need money while they’re in school and incurring [costs], such as tuition fees.”

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In place of the eliminated credits, “The Liberals [may] propose to increase the amounts awarded under Canada Student Grants,” which is money that students receive while in school that they don’t need to pay back.

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However, says Davis, “There’s no indication [the government] would claw back education credits that have been carried forward to this point. Similar to Ontario, [the government] would probably set a date as to when you can no longer claim these credits or accumulate new values.”

Breaking down the benefits

Using the current education amount, students are able to 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 the textbook tax credit, 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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Overall, students’ tax savings aren’t significant when using these two credits, says accountant Stephanie Dietz. “If you’re a full-time student for eight months out of the year, you have $400 plus $65 for the two credits, multiplied by eight. And then, you multiply that total by 15% federally. That’s only tax savings of $558 for a typical year, so eliminating the credits may not impact [wealthy] people’s planning that much.”

Still, students who don’t qualify for grants would potentially receive less support if the two credits are cut, she adds. “The Liberals are moving in line with the idea that if you need assistance to pay for school, you have to qualify for a grant.” This new system would help lower- and middle-income income students most, versus wealthier families where a parent pays for school and then uses the tax credits.

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An alternative to getting rid of the credits would be making them refundable, says Dietz. Some taxpayers would prefer this, she says, since the current credits are easy to calculate.

Davis sees the elimination of the two credits as a plus. For most students, the move would “simply mean a small reduction in the amount of tax credits they would have to transfer to eligible [taxpayers] such as parents, grandparents and spouses,” or a reduction in the amount they’ll be able to carry forward.

He agrees that lower-income families would benefit the most from a move to increase student grants. “These are families that may not have as many resources available, such as personal savings, to pay [education] bills. So they might be resorting to student loans,” and that debt load should be reduced. Plus, “It’s possible that students from middle-class families who haven’t been eligible for grants before will also benefit.”

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Further, all parents will still have the option of using the tuition tax credit, says Davis. “Given average tuition rates in Canada, which are at about $6,200, the tuition tax credit should still be intact and students should be able to transfer the tuition credit. For parents or spouses who are helping students, there’s comfort that they may not lose all tax benefits.”

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