If a student’s income is below the basic personal amount, they can consider carrying unused tuition credits forward or transfer up to $5,000 of the credit to a parent or grandparent.Damir Khabirov/iStockPhoto / Getty Images
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Tax planning is one important aspect of back-to-school preparations that can typically go overlooked for families that have children who are students in post-secondary institutions.
Many students usually face big education bills and have limited work income, leading some to believe it might not be worth it to file a tax return when, in reality, experts say the opposite couldn’t be more true.
By simply filing a tax return, it opens up a slew of opportunities to claim tuition and textbook costs, student loan interest and moving expenses. It also gives students access to certain government programs such as the GST credit and climate action incentive payments.
“I get a lot of people calling, saying, ‘I haven’t done my taxes in five years, I’m a student,’” says Blair Kean, president of Tax Doctors Canada in Markham, Ont. “They don’t have a lot of money, so they forget it. And they don’t want to pay for it. But it’s important.”
Students who delay filing their taxes run the risk of leaving money on the table, Mr. Kean says, because record-keeping can diminish as years pass and the Canada Revenue Agency tends to not pay refunds if the return is more than 10 years old.
Patrick Truckle, partner at accounting firm Crowe Soberman LLP in Toronto, adds that another benefit to filing is the student might be entitled to a refund of taxes paid at summer jobs depending on their income level.
“Occasionally, students work small summer jobs that may not be taxable. Their income [might not be] enough or they would use credits to offset the tax to nil,” he says.
“Frequently, the employer is withholding income taxes on those payments and the student may not realize it. If they don’t file the tax return, the tax that was withheld from their paycheques won’t be reimbursed.”
Save on taxes today
Perhaps one of the most well-known student tax breaks is the non-refundable 15 per cent federal tuition tax credit, which allows students to claim eligible education costs on their tax returns. However, if the student’s income is below the basic personal amount, which is $13,808 for the 2021 taxation year, the student can consider carrying unused tuition credits forward or transfer up to $5,000 of the credit to a parent or grandparent.
Joseph Pagliaroli, tax partner with KPMG Enterprise in Vaughan, Ont., says it ultimately doesn’t matter if the credit is transferred to the higher- or lower-earning parent.
“The benefit of that tax credit is the same to someone making $100,000 or somebody making $50,000,” he says. “It’s a 15 per cent non-refundable credit, so it has the same value to basically all taxpayers.”
What’s more important, in his opinion, is the timing of when the credit is used because of the time value of money.
“My view is you always want to save taxes immediately. So, if the student can’t use it in the current year, I would definitely always recommend trying to transfer to a person who can use it so that at least they can save [on their[ taxes,” Mr. Pagliaroli says.
“If the parent can save, let’s say $750, that can be reinvested to the child to buy additional books, maybe accommodations, a meal plan.”
Those tax savings are worth more today than they would be in the future because clients can make use of the additional cash flow, he adds.
Plan RESP withdrawals strategically
To minimize the tax impact, families should also map out withdrawals from the child’s registered education savings plan (RESP) and be aware of what kind of investments are held in the account as they can have different tax implications, Mr. Truckle says.
Withdrawals of the original investment portion of an RESP is not taxed, but any investment income and government grants are taxed in the student’s hands upon withdrawal.
Mr. Truckle says it’s crucial to take stock of the student’s education expenses for the year and consider all their sources of income to minimize the tax impact.
“You want to avoid a situation in which it’s the final year of school, and you have to pull everything out [of the RESP] because you didn’t take enough out in earlier years,” he says.
“You’ll end up paying taxes in the final year, or there’s money left over and there are either penalties for withdrawing it – clawbacks on the government piece – or you need to transfer it to a [registered retirement savings plan (RRSP)], a [registered disability savings plan] or some alternative plan.”
Specifically, up to $50,000 of RESP contributions can be transferred to an RRSP, provided there’s sufficient contribution room.
Mr. Pagliaroli also says spreading out RESP withdrawals is best practice for tax purposes.
“What you want to do is spread it out over the term of the of the student’s [educational] career so that ... you get the benefit of lower marginal tax rates and gain some tax efficiencies,” he says.
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