Back to school can mean tax savings
David Christianson, BA, CFP, R.F.P., TEP
In many ways, this is my least favourite time of year, when I have to report the shocking news to you that kids will be heading back to school in another two weeks.
The worst part is that this fact is always the early warning signal that summer is waning. (Having to turn the furnace on this week may have been another clue.)
At any rate, let’s try and make some financial gain from all this, or at least minimize the hurt. Sorry, I can’t tell you that back-to-school clothes or school supplies have suddenly become deductible, but we have a few other pleasant surprises.
Moving Expenses
Last summer, many readers were surprised to hear that moving expenses may be deductible for certain students. Moving expenses are generally deductible for any taxpayer who moves more than 40 km to study full time at a post-secondary educational institution, or to take on a new job or self-employment position.
However, the deduction is limited to the amount of employment or self-employment income earned at the new location. Expenses that exceed the income amount can be carried forward and deducted against income in future years.
Post-secondary students can use moving expenses to offset the taxable portion of bursaries, scholarships, fellowships, certain prizes and research grants, to the extent claimed on the tax return, as well as to offset employment or self-employment income.
Tax Credit Amounts
Claims for students include:
- Tuition tax credit
- Education amount
- Textbook credit
These are all non-refundable credits. That means that they will reduce tax that a taxpayer would otherwise be paying, but will not create a refund if the taxpayer is not paying any tax.
Not paying tax? Must be a student…likely with less than $10,000 or so of income.
Don’t waste these credits. CRA allows a transfer of up to $5,000 of these credits (except for moving expenses) onto the tax return of a supporting spouse, parent or grandparent. In that situation, the taxes for the supporting person are reduced. Alternatively, the student can carry these amounts forward to offset taxes in a future year, instead of transferring them.
Claiming the education-related credits requires an official receipt, in the form of a T2202. Most universities now only provide these online (as opposed to giving the student a paper copy), and many only allow them to be printed once. Kids, this means it is very inconvenient for a parent or your tax preparer if you lose that one-time receipt. My suggestion is to only print it when you need it.
Childcare expenses are tax deductible by students if they are single parents, or the lower-income earner of two parents, or the higher-income earner of two full-time students. There is also now a tax credit to offset interest paid on federally or provincially-sponsored student loans. Unused credit can be carried forward up to five years.
Another suggestion is for the student to file a tax return, even if there are no taxes due. This builds up eligibility for future RRSP contributions at a rate of 18% of any employment or self-employment income, and creates a Notice of Assessment which reports these amounts, eligibility for future TFSA contributions, carryforwards of unused credits and deductions, and other potentially valuable information.
Low income students might also be eligible for refundable credits and grants, like the GST (HST) tax credit at age 19.
RESP
If a withdrawal from the student’s RESP (Registered Education Savings Plan) is part of your funding strategy, be sure the student asks the university or community college (or other post secondary institution) for a form or letter called Proof of Enrolment, which must be on the institution’s letterhead. This is separate from a receipt for tuition paid, and must be specifically requested. The financial institution holding the RESP needs this before they can allow the withdrawal.
When planning your withdrawal strategy, remember that any deposits you made to the RESP plan can be withdrawn tax free at any time. However, the government grant portion and any investment growth is taxable to the student. You specify the proportion from each area for each withdrawal.
Consider maximizing taxable amounts while the student has excess credits and deductions, and save the tax-free withdrawals for years when he or she is working and taxable.
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David Christianson is a fee-for-service financial planner and portfolio manager, whose team at Wellington West Total Wealth Management Inc. provides comprehensive financial advice and management. You can e-mail him at dchristianson@wellwest.caor visit his website at www.davidchristianson.com.