Back to School Tax Tips
David Christianson, CFP, R.F.P., TEP
We talked last month about tax deductible moving expenses and how they can be claimed by fulltime post-secondary students who move to go to school, as well as all taxpayers who move more than 40 km closer to a new job.
That must have been good timing, as a whole bunch of readers told me it saved them a bunch of dry reading of the Act. They also asked for a refresher on other tax credits and strategies available to students attending university, community college or any other formal post-secondary education.
The tuition tax credit provides a reduction in taxes of about 25% of the tuition & other expenses paid for attending full or part-time post-secondary schooling. Any other fees assessed that must be paid by all students, such as athletic, admission, library fees and lab charges, exam fees and charges for certificates and diplomas are also included. You’ll need an official receipt, called a T2202, from the institution to claim the credit.
The education credit is based on the number of months of full time-equivalent attendance, and it can also be claimed by part-time students at a reduced rate or by disabled part-time students at the full rate. It saves about $116 in taxes per month that you are enrolled in a post-secondary institution, when you factor in the textbook credit. Also keep receipts to claim the transit pass credit, if using public transit.
One problem with tax credits is that you have to be paying tax in order to use them. Starving students are not always paying taxes, as they can earn almost $10,000 tax free the same as anyone else, before using the credits mentioned above. Luckily, unused credits can be transferred to a supporting spouse, parent or grandparent if the full credit is not needed to eliminate the student’s tax bill. Up to $5,000 a year of tuition and education credits can be transferred, which would result in a tax reduction of about $1,250.
A student can also carry the tax credits forward to a future tax year. Note that once a credit has been carried forward, it can’t be transferred to a supporting person.
Most scholarship, bursary or fellowship income is allowed tax-free. This makes it easier for a good student to be self-supporting (which, by the way, I support).
When planning withdrawals from an RESP, remember that the original capital you invested can be withdrawn tax free at any time, and only the growth and government grant portion are taxable to the student. You specify the proportion you want for each withdrawal. Maximize taxable amounts while the student has excess credits and deductions, and save the tax-free withdrawals for years when the student is taxable.
Childcare expenses are tax deductible by students if they are single parents, the lower-income earner of two parents, or the higher-income earner of two full-time students. Deductible expenses include daycare centres, babysitters, summer camp, day camps, sports schools, or boarding schools. Part-time students may also qualify for partial deductions, based on the number of full months he or she was in part-time attendance.
There is also now a tax credit to offset interest paid on federally or provincially-sponsored student loans. Since the credit might not all be needed in a given year, it can be carried forward up to five years.
As we discussed in detail last month, eligible moving expenses are deductible by students who move at least 40 km to attend school full time.
It’s a good idea for parents and students to have their tax returns prepared together, to optimize the different scenarios of transferring credits and claiming deductions.
If you use a professional tax preparer, make sure you provide all the necessary information on all parties.
As an example, claiming an RRSP contribution for the student might be worthwhile, even though the student is not paying tax and therefore the contribution might appear wasted. If the RRSP deduction reduces income to the point where credits are unused and can be transferred to the spouse, parent or grandparent, total family tax may be reduced. RESP withdrawals might be timed to use up credits.
Be creative. After all, it’s a learning experience.
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David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.