With tuition fees averaging over $6,300 a year in Canada, students and their parents can use all the help they can get to offset at least some of the costs of higher education at tax time.
Fortunately, in Canada there are plenty of tax breaks and deductions to take advantage of. Below is a guide to many of the applicable federal rules but be sure to check on credits available in your province as well.
Tuition tax credit
The tuition tax credit is the king of all higher education tax breaks in Canada. Generally, it allows students 17 and older enrolled at a higher education institution to use their school tuition fees to reduce their taxable income or transfer up to $5,000 worth of credits to their spouse or common law partner, their parents or their grandparents.
How it works:
Suppose that, as student, you have $10,000 in income for the year between RESP withdrawals, non-taxable scholarships and a summer job, and that you paid $6,000 in tuition fees. You wouldn’t need to use any of your tuition tax credits, because the federal basic personal amount exemption, which is $11,474 this year, already offsets all your income, said Gabrielle Loren, a Vancouver-based CPA.
You can pass on $5,000 worth of credits to your spouse, parents or grandparents and carry forward the remaining $1,000 for use against your taxes in the future, added Loren. Because tuition tax credits are non-refundable, they don’t expire until they’re used.
So in a scenario where mom and dad and grandma and grandpa are doing just fine financially, you could instead hoard all of the tax credits and use them after you graduate. That can be a nice way to soften the tax blow when you’re just starting out in your career and your budget is often squeezed between low pay and student loans.
“I’ve seen cases with my clients who’ve gone through medical school where they wind up paying little or no tax for up to three years after graduation,” said Loren.
The fine print:
In order to be eligible, you have to attend a post-secondary level course at an accredited higher education institution in Canada. Students who attend school abroad generally qualify as well.
However, you may not be able to claim the tax credit if you or your parents’ employer is paying or reimbursing your tuition, according to Turbotax.
Mind the paperwork:
Form T2202A is where Canadian schools identifies what kind of tuition fees each student paid. If you’re abroad, you’ll receive a similar tax slip called TL11.
If you want to transfer your credits to someone else, you need to file your tax return even if you have no balance owing, said Loren. You need to claim the tax credit first, and then pass on whatever eligible portion of it to your parents, grandparents or spouse by indicating your’s doing so on the tax slip and signing it.
Tuition tax credit transfers are a fairly frequent audit target, said Loren, who used to work at the CRA. So it’s essential to do all the paperwork and keep it for your records.
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Student loan interest deduction
If you have government student loans, you get to deduct the interest on those loans from your taxes. Private loans and loans backed by foreign governments, however, are not eligible.
Even government-backed loans are issued through financial institutions, which will send you a statement showing how much you paid in interest on the loan for the year. For federal government loans, enter this amount on your federal tax schedule. Claim provincial tax credits on your provincial return.
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An important footnote:
It’s increasingly common for students to fold their students loans into a line of credit upon graduation, said Loren, the CPA.
“The banks will literally set up tents on campuses to get students to sign up for lines of credit,” she told Global News. This is especially true for faculties like law and medicine where many graduates will enter the job market with six figures of student debt but also with a good chance of earning a six-figure salary.
Credit lines generally carry lower interest rates than student loans and more flexible repayment plans, so it’s easy to see their appeal, said Loren.
However, rolling your student loan into a credit line means giving up your student loan interest deduction, according to Loren. So make sure to do the math to figure out whether a credit line would actually save you money.
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Education and textbook tax credits (2016 and previous years alone)
Unfortunately, the Liberal government axed these credits in the 2016 budget, effective Jan. 1, 2017. You can still claim them on your 2016 return, however, and for any previous year. Also, any unused credit will carry forward in 2017 and subsequent years.
How does it work?
With these non-refundable tax credits, you get to claim a set amount for every month of the year in which you are enrolled in a qualifying higher education program as either a full-time or part-time student.
This year, the education tax credit is $400 per month for full-time students and $120 per month for part-time students. For textbooks, the monthly credit is $65 and $20 respectively.
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Here are three other types of federal deductions some students may be able to claim:
Moving expenses deduction
If you’re attending school away from home — whether in Canada or abroad — you may be able to deduct expenses such as airfare, the cost of hiring movers and connection and reconnection charges. However, there are so many restrictions attached to this deduction that most students won’t be able to actually use them, warned Loren.
To be eligible you need to:
- Move more than 40 km away from home
- Be a full-time student
- Be the recipient of things like taxable scholarships, research grants and prizes, or have employment income. That’s the only type of income from which you can deduct moving expenses.
Since most scholarships and grants are non-taxable or only partially taxable and it’s rather difficult to hold down a job while you’re also a full-time student, this deduction effectively applies to a small number of students, noted Loren.
Also, claiming moving expenses comes with a higher chance of being audited, as this is an often abused deduction that the CRA looks at very closely, Loren added.
Mass transit deduction
If you have any income to offset, you can use the cost of any transit pass to do so (but single-fare tickets do not count). This deduction can help you lower your income without using up as much of your tuition tax credit, which you can carry forward to another year instead, Loren noted.
Child care deduction
This one is for parents who have to pay someone to care for their children so they can work or attend school. (In other words, getting grandma to watch your kids doesn’t count.)
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The maximum amounts you can claim are:
- $8,000 for children under the age of 7 years at the end of the year
- $5,000 for kids between 7 and 16
- $11,000 for dependent children with disabilities
The catch is that these amounts apply only to two-thirds of your income. So if you only made $10,000 last year, the deduction you’d be able to claim if you had a child under 7 is only $6,667. Single parents who are students often don’t make enough to claim the full amount, according to Loren.
However, for couples where one or both parents are students, the higher-earner can claim the deduction. Normally, the lower-income spouse has to use the deduction.
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Bonus tip: Set up a family trust
Finally, here’s a tip for self-employed parents who have an incorporated business. If you have kids attending college or university you can set up a family trust to pay for their tuition and living expenses and minimize your tax burden, Loren suggested.
The family trust will be a shareholder in the corporation, eligible to receive dividends, which are after-tax profits. Those funds will then be distributed to your kids, the trust’s designated beneficiaries.
For example, if your company earns $100,000 a year, your tax bill would be $12,500 in B.C., potentially more than $10,000 less that you would have had to pay in personal income taxes. That leaves $87,500 in net profits, of which the trust receives, say, $30,000 in dividends. The trust then gives that dividend to your kids, who must be 18 years old and over in the year. If they had no other income, they would have to pay about $400 in tax, which they can offset with the tuition tax credit.
“It spares you having to pay taxes on that money, which you would have had to do if you’d taken money out of the company another way. It’s very tax-effective way to fund your kids’ education,” said Loren.
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