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Post secondary students and income tax

It shouldn’t be news to anyone that while the cost of obtaining a post-secondary education continues to rise, the government’s financial support of post-secondary institutions has, no less, declined. Additionally, the generous government student loan and grant programs available to earlier generations of students are no longer as generous as they once were. A realistic annual budget (including tuition, residence, and textbooks) for even a general arts or science undergraduate program now runs between $15,000 and $20,000. And, where a student decides to pursue post-graduate work or to enter a professional study program like law, dentistry, or medicine, those costs will skyrocket.

The most sensible solution to meeting the cost of obtaining a post-secondary education is, of course, to start planning – and saving – early, and to take advantage of government-sponsored savings programs like registered education savings plans and their ancillary grants. However, even well-intentioned parents who are diligent savers would likely have trouble coming up with enough funds to save the full cost of post-secondary education – especially for more than one child.

The good news, apparently, is that in recognition of the realities of the increasing cost of obtaining a post-secondary education, the federal government provides a number of tax “breaks” for post-secondary students. While the rules governing eligibility and the amount of the federal tax “breaks” can be detailed, students generally can claim a non-refundable tax credit for tuition (but not residence) bills, an “education amount” based on the number of months they attended school during the tax year, and a “textbook amount”.

Aside from the cost of residence or off-campus housing (which are not, in any case, deductible or creditable for federal tax purposes), the largest single expense for most students is tuition fees, which can range from around $5,000 to over $15,000, depending on the school and the program. No matter what the amount, students are entitled to a non-refundable federal tax credit (which reduces their tax otherwise payable) equal to 15% of their tuition bill. Each province and territory also provides a non-refundable tax credit for tuition paid, with the percentage amount ranging (for 2013) from 4% to11%.

Both full and part-time university students can also claim the “education tax credit”, which is calculated as a fixed amount for every month of full or part-time attendance during the tax year. For 2013, the full-time amount to be claimed on the federal tax return is $400 per month, while the part-time amount is $120 per month. The total amount claimed is then multiplied by 15% to arrive at the credit claimed on the federal tax return. As with the tuition tax credit, the provinces all offer an education tax credit, with both the amount and the conversion percentage varying by province.

The final “standard” deduction available to post-secondary students is the so-called “textbook amount”. The name is somewhat misleading, as neither eligibility nor the amount of the credit depends on expenditures made for textbooks. Rather, the federal textbook amount is a fixed monthly amount (currently $65 for full-time and $20 for part-time students) which, like the tuition and education amounts, is converted to a credit by multiplying by 15%,, and which can be claimed by any student who is eligible for the education amount.

Non-refundable tax credits, like the tuition, education, and textbook credits outlined above, work by reducing the tax which the individual claiming the credits would otherwise have to pay. However, post-secondary students generally have relatively low income and, consequently, relatively low tax bills, and so may not be able to “use up” all of their available credits in a single tax year. Two solutions are possible.

First, the student may transfer the unused credit to a spouse, parent, or grandparent (and it’s not necessary for the parent or grandparent to have actually paid the tuition bill in order to claim the transferred credit). Second, the student can keep the excess credit and claim it in any future tax year when income and therefore the resulting tax payable will presumably be higher. There are some restrictions and limitations on the transfer of student tax credits, but generally speaking, most students should be able to transfer credits to parents or grandparents without difficulty.

It’s almost inevitable, notwithstanding savings, part-time and summer jobs, and all of the tax “breaks” offered to post-secondary students, that most students will end up incurring some debt in order to pay for their education. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or the equivalent provincial program), interest paid on those loans after graduation can qualify for a tax credit at both the federal and provincial levels. It’s important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (for example, through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit.

At the mid-point of summer, both returning post-secondary and first-year students will be preoccupied with choosing courses and finding a place to live, while their parents will likely be more concerned with due dates for first semester tuition and residence bills. The “sticker shock” sometimes caused by those bills will hopefully be mitigated by the knowledge that the amounts will be offset somewhat next spring when tax credits may be claimed for most of the required expenditures.

Finally, the tax credits, deductions, and benefits available to post-secondary students, and the rules governing the calculation, transfer, and carry-over of those credits can be confusing, especially for those dealing with them for the first time. Anyone who has questions should consult the excellent Canada Revenue Agency guide P105, “Students and Income Tax”. A current version of that guide is available on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html.