Family Tax Planning Series – Part II: When the Kids Are in Post-Secondary
The series continues! During Part I, we discussed several tax planning items related to earlier childhood years. Part II of our Family Tax Planning series will be focused on tax benefits and deductions in the post-secondary years. Those tuition fees are not cheap and here are some items to help offset those costs.
You will probably recognize a few items but there are also a few that are overlooked and often missed. We are always happy to discuss the items that you are particularly interested in.
Post secondary students should file a tax return:
The most common misconception that Canadians have is not filing a tax return when they step into the post-secondary age. “Why do I have to file a tax return when I don’t have any taxable income?”
Here are a few reasons why:
1. Transfer of tuition credits to parents
Every year, post-secondary institutions are required to issue students a T2202/T2202A Tuition and Enrolment Certificate. Students are usually able to access this form in their school portal. This form will indicate the tuition tax credit available.
Students usually have minimal to Nil income and may not be able to fully use the tuition tax credit. In this case, they can carryforward the credit to future tax years when they have more income, usually when they have completed their post-secondary education.
Or students could transfer up to $5,000 of the tax credit to their spouse, parent, or grandparent in the year that they incur the tuition expenses. The recipient of the transfer would then apply a tuition tax credit on their return. The catch here? The student needs to file their return and show the transfer first. And if the student can use it, they have to. It is not discretionary to hold it for other years.
2. Creates RRSP limit
Student taxpayers will usually have low income during their studying time in which contributing to an RRSP is not that tax beneficial. As the RRSP limit is created by taking 18% of your total earned income (includes employment, self-employment, rental, and farming income) in the year, filing a tax return allows the RRSP limit to start building for future years.
When the students graduate and start to earn more income, they will be able to take advantage of the RRSP contribution room they’ve accumulated previously. And you are correct, CRA will only recognize this if you file your tax return!
3. GST/HST benefits, ACLAR benefits (for Alberta residents) and CAI payments
GST/HST credit – this credit is a tax-free quarterly payment for individuals and families with low and middle incomes to help offset the GST/HST that they pay on various purchases.
Alberta Climate Leadership Adjustment Rebate (ALCAR) – similar to the above, this is a tax-free quarterly payment to low and middle income individuals and families to help with the provincial carbon price.
For both benefits above, the amount you receive depends on your adjusted family net income that CRA calculates when you file your tax return. The payments are sent by CRA in January, April, July, and October.
Climate Action Incentive Payment (CAI) – this is a tax-free quarterly payment for individuals and families to offset the cost of the federal pollution pricing. This payment is only available for residents of Alberta, Saskatchewan, Manitoba, and Ontario. Unlike the two benefits above, this payment is not based on your adjusted family net income, but you still have to file your tax return as this is how CRA determines your eligibility.
https://www.canada.ca/en/revenue-agency/services/child-family-benefits/cai-payment.html
Tax efficient ordering of RESP withdrawals:
Being thoughtful planning parents, as noted in our first article, there are likely significant funds in your child’s RESP account at this stage. Once they enroll in a qualifying post-secondary education program, money can be withdrawn from the RESP to help cover their finances while studying. There are two types of withdrawals:
Non-taxable draws – these are a return of the contributions made
Taxable draws – this includes the following:
Various grants provided by the government for having a RESP account
The investment earnings on the grants and the contributions made
Depending on your child’s needs, the type of RESP withdrawals can vary. The income levels from other sources (job/scholarship) and tuition credits estimated should be reviewed with your advisors each year to determine the optimal mix of taxable and non-taxable portions.
We are always happy to work with your investment advisors. It’s never too early to tax plan!
Taxation of scholarships for full-time and part-time students:
Post-secondary school scholarships, bursaries, and education grants, usually included in a T4A slip, are not considered taxable income as long as the student is considered a qualifying student. A qualifying student, in at least one month during the year, is enrolled in a qualifying program as a full-time student at a designated educational institution.
What if they only study part-time? They can also receive a reduced exemption limited to $500 which means any scholarship income received above that limit will be taxable.
Deductibility of student loan interest:
If your child took out student loans to cover tuition and other education costs, loan interest incurred at the time of repayment is considered a non-refundable tax credit to lower their taxes. The financial institution should provide a statement for the total interest paid during the calendar year.
If there is not enough taxable income in the year to claim the interest, it can be applied on any one of the next five year’s tax returns.
Moving expenses:
This is another tax deduction that is often overlooked by most taxpayers. If your child moved to study full time at a post-secondary institution, any moving costs incurred such as travel expenses, hotel accommodations during the move, meals and storage costs can be claimed against any scholarship income that they earn during the year.
Any deductions that were not used due to not having enough income will be carried forward to future tax years when the same type of income is earned.
Similar to the above, they can also claim moving expenses when they move back home during a summer and deduct it against their summer employment income.
Stay tuned for the final part of our Family Tax Planning series where we will delve into tax planning strategies that YOU can undertake WITH your adult children. Click here for Part III: Adults.