Managing tuition tax trouble

As financial advisors, we are often in the position to help students, whether it’s by guiding them with budgeting, creating a plan to repay their student loans, or simply helping their parents save enough to cover tuition. That’s why it behooves the advisor to stay on top of the tax breaks available for students.

Post-secondary students used to be able to claim three primary credits to reduce their tax bills: for tuition, education and textbooks. The tuition credit is a non-refundable credit and is worth 15% of the amount of tuition fees, without limit. The education and textbook amounts were eliminated in the 2016 budget, effective Jan. 1, 2017. No changes were made to the tuition tax credit, and the carry-forward rules will continue to apply for unclaimed education and textbook tax credits (as well as the tuition credit) that arose prior to 2017.

Some students may not need to claim all of their credits to reduce their income tax to zero. As a result, students can transfer the unused amounts to a spouse, partner or (grand)parent, or carry forward unclaimed amounts (including former education and textbook amounts) indefinitely. The person claiming the transferred credit, such as a parent (which could be a natural parent, a step-parent, an adoptive parent or even a spouse’s or partner’s parent), need not be the one who paid the tuition.

The maximum amount that can be transferred is $5,000, less the amount of tuition for the current year that is claimed on the student’s return. In addition, amounts carried forward from previous years must be used by the student before the current year’s amounts. Any remaining amounts carried forward can only be claimed by the student in a subsequent year and cannot be transferred.

A bizarre technical rule, however, requires the student to first use her tuition credits to reduce her tax payable to zero before carrying forward and/or transferring any unused amounts. This rule was the subject of a recent Tax Court of Canada case (Zhang v the Queen, 2017 TCC 258) involving a Vancouver dentist.

Zhang was a dental student from 2009 to 2012. During that period, she accumulated significant tuition and education tax credits. She used some of those credits to reduce her 2013 tax payable; however, by the end of 2013, she still had $52,040 in tuition and education tax credits available to be carried forward to her 2014 tax year.

Student loan interest deductibility

This tax season, people with outstanding student loans may be eligible to claim the interest paid on those loans in 2017 or the preceding five years. To qualify, the loan must be governed by federal or provincial laws (e.g., the Canada Student Loans Act). Only the debtor may claim student loan interest, even if a relative actually paid the amount. If the taxpayer has no tax payable for the year the interest is paid, it’s better not to claim it. Instead, he or she may carry the interest forward for up to five years.

Zhang earned Canadian dividend income in 2014 and, when she filed her 2014 tax return, she claimed a dividend tax credit. She did not use any of her tuition and education tax credits that were available to be carried forward from 2013 and, as a result, she assumed she could carry forward the full amount of $52,040 in tuition and education tax credits to 2015.

Much to her surprise, when Zhang filed her 2015 tax return and tried to claim those credits, her claim was denied by the CRA on the basis that she had no credits available in 2015. In fact, the CRA had applied all those credits to her 2014 tax year.

The issue before the Tax Court was whether a taxpayer’s tuition and education tax credits available to be carried forward at the end of a tax year are reduced by the amount of any tuition or education credits the taxpayer chooses not to claim. In this case, the taxpayer didn’t claim her tuition credits because she used the dividend tax credit, but this situation can also occur when a taxpayer claims a foreign tax credit on foreign income earned in a year.

After careful review, the judge found that the law requires a taxpayer’s unused tuition, textbook and education credits to be reduced by the amount that the taxpayer “may deduct […] for the year.”

In other words, it’s irrelevant whether the taxpayer chooses to deduct her tuition, textbook and education credits in a year to reduce her tax to zero. Since she was permitted to claim the amounts, her credits are simply reduced whether she actually claims the amounts or not.

To support this conclusion, the judge referred to both the Department of Finance technical note that accompanied the rule’s enactment along with the 1996 federal budget, which states: “[T]he budget proposes to allow the student to carry forward these credits indefinitely until they have sufficient tax liability to make use of them.”

As the judge explained, such phrasing “indicates that a student will be forced to use the credit once he or she has income against which the credit could be applied.” Accordingly, Zhang’s claim for the tuition and education tax credit was denied.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.