TAX SAVINGS FOR STUDENTS

Tax season offers a valuable opportunity to ensure all legitimate tax advantages are identified and optimized, even for students enrolled in a Canadian post‐secondary institution who might think their income is too low to warrant attention.

In addition to income from part‐time or summer employment, other common types of income for students includes research grants in excess of deductible expenses, interest and investment income, and educational assistance payments from investment income earned in an RESP.

Once income is accounted for, students should assess available credits and deductions.

Tuition Amount

Tax slips are provided to students by their educational institution with details of eligible tuition amounts; however, caution should be exercised because the issuance of a tax slip does not always indicate eligibility for the tax credit. The institution issues tax receipts to all students regardless of who actually pays the tuition. If a student's employer (or parent's employer) pays or reimburses the tuition, the tuition credit can only be claimed if the amount was included in the student's (or parent's) income. As well, tuition paid through a job training program or government‐paid program for athletes only qualifies for the credit if the amount was included in the student's income.

It is important that students follow the tax rules because claiming a benefit amount for which an individual is not eligible can result in reassessments, interest and penalties. Double‐dipping, such as claiming a tuition credit when an employer funded the cost, can have significant consequences. Keep in mind, tuition amounts paid by an employer are more beneficial than the tax credit.


What's eligible and what's not...?

Students pay a variety of fees throughout the school year that are not eligible for inclusion on the tuition slip issued by the educational institution. Examples of amounts not eligible as tuition include board and lodging, student activity fees, and administrative penalties.

Examination fees paid to an educational institution, professional association or provincial ministry to take a professional, trade or occupational examination are eligible to be treated as a tuition expense. While there are strict guidelines as to the type of organization or professional body issuing the receipt, the addition of examination fees broadens the benefit that arises from the tuition tax credit.

Education Amount

Educational institutions issue tax slips confirming the student's full or part‐time status for eligible months in the taxation year. This allows students to claim an education tax credit based on amounts of $400 (full‐time) or $120 (part‐time) per month. Similar to the tuition tax credit, those students whose employer or nonarm's length party paid or reimbursed the student for the tuition amount are not eligible to claim the education tax credit.

Textbook Amount

Students who are eligible to claim the education amount may also be eligible to claim the textbook tax credit, which provides the student with a credit based on amounts equal to $65 (full‐time) and $20 (part‐time) for each eligible month noted on the institution‐issued tax slip.

Note that the federal budget of March 23, 2016, proposes to eliminate the education and textbook amount credits effective January 1, 2017. However, the budget also proposes to allow the carry forward of these amounts that arose prior to 2017. The tuition amount credit is not impacted by these proposals.

PLANNING TIP

Tax credits for tuition, education and textbooks are first claimed by the student up to the amount required to reduce the student's income tax payable to zero. If the amount not claimed by the student is less than $5,000, the difference between $5,000 (or total eligible amount if less than $5,000) and the amount claimed by the student can be transferred to the student's spouse or common‐law partner, or to the parent or grandparent of the student or the student's spouse or common‐law partner. The transfer option is only available in the year the tuition is incurred.

Any amounts not utilized or transferred by the student can be carried forward to a future year, and must be claimed in the first year that taxes are payable. Transferring an amount out of the carry forward pool is not an option. When students want to retain tuition amounts in a carry forward pool, it is important that they file an income tax return, even if no taxes are payable.

This system works well because the combination of transfers and carry forwards ensures all tuition amounts can qualify for the credit.

Moving Expenses

The cost of moving between school and a parent's home over the period while attaining a degree can add up. Full‐time students enrolled in a post‐secondary university or college may be eligible to claim certain moving expenses. The move must be at least 40 kilometres closer to the new place of work or 

A student moving to attend school may be able to deduct eligible moving expenses from the part of any scholarship, fellowship, bursary, or grant that is required to be included in the student's income. Even part‐time employment while attending school is considered employment income against which eligible moving expenses could be deducted. Alternatively, students moving to begin work such as summer employment or running a business may qualify to claim eligible moving expense against the income earned from employment or self‐employment at the new work location. The 40 kilometre measurement applies to all eligible moves and is measured against the shortest public route.

PLANNING TIP
Receipts are required for most moving expenses, so saving the receipts is important.

Moving expenses that exceed eligible income amounts can often be carried forward to the following year and deducted against the same type of eligible income amounts in the subsequent year.

International Students

International students are not automatically exempt from taxation. Rather, international students studying in Canada need to begin by determining their residency status for income tax purposes. Residential ties to Canada together with deeming provisions that consider a student's length of stay in Canada during a taxation year are used to establish residency status. An international student residing in Canada, even for part of a year, could be considered a Canadian resident for income tax purposes. While there is certainly the potential for an income tax liability, these individuals may be eligible for benefits or credits such as the Canada child tax benefit or universal child care benefit.

Optimizing available credits and deductions is a great way to ensure every dollar pays a good return!
 

This article is reprinted from Comment, Edition 296 – March/April 2016, published by
The Institute for Advanced Financial Education.