Tax savings tips for students

Tuition fees for undergraduate programs continue to rise in Canada. While they may not be the 10% annual increases experienced in the 90’s, it is still troublesome to know that tuition increases consistently exceed inflation year over year.

Statistics Canada reports that on average, tuition fees are approximately $5,138 in Canada with the highest average tuition occurring in Ontario (at approximately $6,307) but the costs appear to be worth it.

They also report that Canadians who complete post secondary education earn substantially more than those who do not. As a result many advisors spend a great deal of time finding ways to help clients fund their education objectives.

As the summer winds down and conversations about funding education for clients and their families ramp up, remember that tax planning for students can become a key component of the overall ‘education plan’. Students can save a bundle if they plan properly and take advantage of the number of tax opportunities available to them. This helps to keep the rising costs of pursuing higher education as low as possible. Here are some tax savings opportunities to keep in mind for your upcoming meetings with clients.

Tuition Tax Credit

A 15% federal non-refundable tax credit is available for eligible tuition fees paid to a university, college or other educational institution in Canada for post-secondary courses. Tuition credits may also be available if the HRSDC certifies an educational institution or if your clients attended certain universities or colleges outside of Canada as well. With more people taking courses over the internet, it’s important to note that tuition credits will only be available if clients are taking courses that lead to a degree on a full-time basis and are virtually present at the university by way of scheduled, interactive, course related activities conducted over the internet. There are also provincial and territorial tuition tax credits as well.

Education & Textbook Credits

For each month that students attend a university, college, a designated institution in Canada or certain universities or colleges outside of Canada, education tax credits will also be available. The amounts are $400 per month for full time students and $120 per month for part-time students. If clients qualify for the education amounts, they will also qualify for textbook credits as well. The credits are worth $65 per month for full time students and $20 per month for part-time students.

Transfer of Tuition, Education and Textbook Credits

Regardless of who paid for the tuition, the credits must first be claimed by the student. If he or she cannot utilize all of the tax credits (because taxes payable have been reduced to zero), then the student has the choice of either carrying forward the credits indefinitely so that they may be used to reduce future taxes, or he or she may transfer up to $5,000 of the unused credits to a spouse or common-law partner, parent or grandparent (which also includes the spouse / CLP’s parent or grandparent) in the current year.

Scholarships

Scholarships, fellowships and bursaries are considered to be fully tax exempt if the student qualifies for the full-time education tax credit. As of 2010, part-time students may not have the full exemption available to them and thus may have a portion of their scholarship taxable in the year received. If the student does not qualify for the full-time or part-time education tax credit, then the first $500 of the scholarship is exempt while any remaining amount is generally taxable.

Student Loan Interest

A 15% non-refundable tax credit is available for interest paid on loans provided to students under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or similar provincial or territorial statutes. The interest costs can only be claimed by the student and if necessary, can be carried forward for a period of up to 5 years. Keep in mind that student bank loans do not qualify for the tax credit. Therefore, if the student decides to borrow from the bank, they would only be better off financially if the interest rate on the bank loan is equal to or lower than the after-tax cost of interest from any loans that would be eligible for the tax credit.

Moving Expenses

Moving expenses can be deducted if the students move is 40km closer to the new educational institution and they are a full-time student. Any moving expenses can be deducted against any taxable portion of a scholarship, bursary, or research grants. Some common deductible expenses include transportation and storage costs for household items and travel expenses such as meals and accommodations. Moving expenses would also include moving back home after the school closes out for the summer as well.

Child Care Costs

If students incurred child care costs in order for them to go to school, then those costs are deductible against any income earned in the year if the child is under 16 or had a mental or physical impairment. Generally, the lower income spouse is the one who claims the deduction, but, in the case of a student, it is possible for the higher income earner to claim the deduction, making the deduction much more valuable.

Educational Assistance Payments (EAPs)

Clients who are the beneficiaries of RESPs are taxed on EAPs received from their respective RESPs. EAPs consist of growth and grant – original contributions are not taxable. Assuming the student is not taxable (i.e., taxable income is less than total non-refundable credits including the basic personal amount, tuition, education and textbook amounts), then no taxes will result making this a great income splitting strategy.

In addition, the 2011 Federal Budget made it a little easier to receive EAPs from RESPs if clients are attending school outside of Canada by reducing the minimum consecutive course requirement for claiming tuition, education and textbook credits from 13 weeks to 3 weeks. This will help more students claim the tax credits, but will also help them qualify for EAPs from their respective RESPs.

Public Transit Amount

A 15% non-refundable federal tax credit is available on the costs of monthly or annual public transit passes during the year. This is a fairly new tax credit that will help students who rely on buses, streetcars, subways or commuter trains in order to get to school.

File Tax Returns

Even though students may not be taxable thanks to the various tax credits available, they should still be encouraged to file tax returns. Any employment income will help them accumulate RRSP contribution room for the future. Also, when filing TD1 forms with their respective employers, students should be sure to note all available credits. Doing so will reduce the amount of tax withheld from their pay, negate the necessity of waiting until tax filing time to receive their tax refund, and help improve their cash flow position. Students will appreciate that!

Frank Di Pietro

Tax & Estate

Frank Di Pietro, CFA, CFP, is assistant vice-president of tax and estate planning at Mackenzie Investments. He can be reached at fdipietr@mackenzieinvestments.com.