Back to School
With September around the corner, Back-to-School is on the mind of Students and Parents alike. While students in primary or secondary school will not see any notable changes in finances, it’s a different story for Post-Secondary students as they now enter the world of Financing and Taxation.
TAX CREDITS & DEDUCTIONS
Tuition Fees to Canadian Educational Institutions becomes the primary expense of post-secondary education and unfortunately, not all the funds you’ll spend qualify for the Tuition Tax Credit. The good news is that you don’t have to think about it, the post-secondary institution will look after it all for you. There is no need to keep all those receipts and proof of payment for the many expenses you may occur.
Canadian post-secondary institutions are required to issue to you each year Form T2202 which outlines the numbers of months you attended in the prior calendar year as well as the amounts you paid that qualify for the tuition tax credit. This form can be downloaded from the institution from the same place you get your schedule and marks and will be available no later than February following the calendar year.
Parents – The Tuition Tax Credit belongs to the student – regardless of who’s paying the bills. The student must use the tax credit to reduce their tax payable to zero first. They may then transfer any unused tuition credit available to a supporting person, up to a maximum of $5,000.
Note that while slightly different, most post-secondary institutions in the USA also qualify for the Canadian Tuition Tax Credit.
Registered Education Savings Plan (RESP) Withdrawals now become available to draw on to assist with paying tuition fees and other post-secondary expenses. The maximum withdrawal for a first-time RESP student in the first 13 weeks of enrollment is limited to $8,000 maximum. After the 13 weeks, it’s up to you.
RESP Savings Plans consists of three different sections and it’s important to understand how to withdraw funds and which “bucket” to remove the funds from.
- Contribution Bucket is the amount of the contributions made to the RESP. This is the capital contributed and withdrawn without taxation having any affect on the amounts.
- Investment Income Bucket is the investment income earned on the contributions throughout the life of the plan. This investment income becomes taxable in the hands of the student when withdrawn from the RESP.
- Grants Bucket is the funds contributed by Federal and/or Provincial governments towards the cost of post-secondary education. In general, this portion of the funds is not taxable, but is required to be re-paid if it’s not used for post-secondary education.
Identifying which “bucket” you’re withdrawing funds from affects your taxes. For example, if you have no income from other sources during the year, you will withdraw from the investment “bucket” simply because the first $15,000 of your income is tax-free each year. If you had a summer job or other income during the year and earned $15,000, you will withdraw from the Grants or Contributions “Bucket” as neither of these attract income tax.
Please be sure to discuss which “bucket” to draw from with your Financial Advisor.
Other Tax Implications and Benefits
Scholarships, Bursaries and Fellowships are reported as income on the students tax return in the year received however, the Income Tax Act allows a tax exemption on the funds
- Up to $500 for students not eligible to claim the Education Amounts (Tuition Fees)
- Up to 100% of the related income for students eligible to claim the Education Amounts (Tuition Fees)
Moving Expenses are a tax deduction for a student to re-locate to a qualifying post-secondary educational institution under certain circumstances:
- The relocation is more than 40 kilometres
- Moving expenses are deductible against employment / self-employment income earned as well as the taxable portion of any research grants or other awards.
Other Reasons to File
Once a Canadian resident reaches the age of 18, various refundable tax credits become available to the student such as:
- GST / HST Credits
- Canada Carbon Rebate
- Provincial Sales Tax and/or Rent Grants
- Note that “residency” at the post-secondary institution does not qualify as rent.
Article originally posted at The Accounting Place – https://theaccountingplace.ca/taxes/back-to-school/
For further information regarding your personal situation, please contact your Financial Advisor.