Student tax-saving opportunities that make the grade

As another school year approaches, college and university students and their families are faced with the reality of the high cost of post-secondary education in Canada. While tuition fees are steep, they are only a part of the cost — books, transportation, residence, food, and other expenditures must also be factored in. Fortunately, there are several tax-saving opportunities that may assist post-secondary students with reducing their financial burden. This article explores some of these opportunities and discusses how students can manage the often-surprising tax impact of withdrawing from a Registered Education Savings Plan (RESP).

Tuition tax credit

Students may claim a federal non-refundable tax credit equal to 15% of eligible tuition fees provided that the student is enrolled at a qualifying educational institution in Canada and pays the institution more than $100 in total costs.

Generally, qualified educational institutions are universities, colleges, and other educational institutions that provide academic courses or occupational skills courses (subject to certain conditions) at a post-secondary level. Tuition fees paid for courses taken either online or via correspondence may also qualify for the tuition credit. Students in full-time attendance at a college or university outside of Canada may also be eligible to claim this credit.

As of 2018, Ontario and Saskatchewan no longer have a provincial tuition tax credit. Alberta eliminated its tuition and education amounts effective for 2020. The remaining provinces and territories allow a provincial tuition credit for students residing in that province or territory.

It is possible to transfer up to $5,000 in current year tuition amounts to a spouse or common-law partner, or a parent or grandparent subject to specific requirements and limitations. Students can carry forward any unused tuition credits to future years. Note that the amount allowed to be transferred for provincial tax purposes may differ from the federal limit of $5,000.

Education and textbook tax credits

Effective January 1, 2017, the federal education and textbook tax credits were eliminated. However, any unused amounts carried forward from prior years for education and textbook tax credits may still be claimed in the current year or continue to be carried forward to future years.

A provincial education tax credit is still available in Manitoba, Nova Scotia, Prince Edward Island, Newfoundland, Northwest Territories, and Nunavut. However, only Nunavut continues to offer a provincial textbook credit to qualifying students.

Canada Training Credit

The Canada training credit (CTC) is a new refundable tax credit available for 2020 and later years to help working Canadians with the cost of eligible training fees. Starting in 2019, an individual who is at least 25 years old at the end of the calendar year will accumulate $250 of CTC limit in respect of the next tax year, up to a maximum of $5,000 in a lifetime, provided they:

• File an income tax and benefit return for the year.
• Are resident in Canada throughout the year.
• Have a total working income (including maternity and parental benefits) of $10,100 or more (in 2020).
• Have individual net income (for 2020) that doesn't exceed $150,473.

An additional $250 of CTC limit will be added each year that the individual is eligible, until the lifetime maximum is reached, or they turn 65, whichever happens first. Each year, the individual's CTC limit will be communicated on their latest notice of assessment (or reassessment) and will also be available through the CRA's My Account portal.

Only individuals between the ages of 26 and 65 (as of the end of the calendar year) can claim the CTC. The amount of CTC that can be claimed is limited to the lesser of 50% of the eligible tuition and fees paid within the year and the individual's CTC limit for the tax year. To claim the CTC on their return, an individual must satisfy all the following conditions:

• File an income tax and benefit return for the year.
• Have a CTC limit for the year that is greater than zero.
• Be resident in Canada throughout the year.
• Have paid tuition or other fees to an eligible educational institution for courses taken in the year for which the credit is being claimed (or to certain other educational bodies for an occupational, trade or professional examination).
• The tuition and fees are otherwise eligible for the existing tuition tax credit.

The CTC can be claimed in the same taxation year as the tuition tax credit. However, in such cases, the amount of tuition tax credit that can be claimed will be reduced by 15% of the CTC claimed in the year.

Credit for student loan interest paid

Even with savings and parental or familial support, students may end up needing to incur student debt to subsidize their university or college expenses. If a student receives financial assistance from one of the federally or provincially government-sponsored programs, the interest paid on those loans could qualify for a tax credit when calculating both federal and provincial income taxes. Student loans under government-sponsored programs generally do not require repayments for the first six months after a student leaves school.

In addition, interest on such loans (where applicable) does not typically start to accrue until a student completes their full-time studies. As such, any interest paid when due will be eligible for a tax credit that can be claimed against income earned after their studies have been completed. Note that for Canada Student Loans, interest will not start to accrue until six months after a student has completed their full-time studies.

In addition, as part of the measures announced by the federal government in the 2021 budget, interest accrual on Canada Student Loans and Canada Apprentice Loans has been suspended from April 1, 2021, until March 31, 2023. Only interest on loans extended under government-sponsored programs will qualify for this credit. Also, while the credit is not transferable, any unused portions can be carried forward for up to five years.

Note that you can't claim interest paid on a loan other than a qualifying student loan. For example, interest on a student loan combined with a non-qualifying loan would not qualify for the credit. Furthermore, if an existing qualifying student loan was renegotiated with a bank or other financial institution or has otherwise been included in an arrangement to consolidate loans, the interest paid on the resulting “new” loan will also fail to qualify for this credit.

Payments from an RESP

If you are a beneficiary of an RESP, you can make withdrawals from the plan once you start your qualifying post-secondary program.

RESP basics

RESPs are an agreement between the plan “subscriber” (often the parents or grandparents, but can include another guardian, relative or friend) and the plan “promoter” (typically financial institutions) for the student — the plan “beneficiary” — who can generally benefit from the funds contributed to and the income earned in the RESP.

The subscriber makes contributions to the plan. The promoter manages and invests the contributions, as well as the accumulated income earned on the contributions. If the RESP qualifies for the Canada Education Savings Grant (CESG) offered by the federal government or one of the provincial savings plans, the promoter will invest the money from these deposits.

The investment earnings and grant funds are taxed in the student's hands when the money is withdrawn from the plan. Any such taxable payments are referred to as “Education Assistance Payments” (EAPs) when paid to the student. On the other hand, the original contributions themselves can be withdrawn tax-free — by either the student or the subscriber — since they were made from tax-paid funds.

RESP withdrawals

When you are enrolled in a qualifying educational program, you will be eligible to receive EAPs from the accumulated income earned in the plan and any government grants that were paid into the plan. Most full-time and part-time university and college programs in Canada will qualify, provided the courses are at least three weeks in length and meet the minimum time requirements. Attendance at a foreign educational institution can also be eligible, subject to certain conditions. Before making any EAP payments, the plan promoter will likely want proof that you meet the enrollment requirements.

In addition, a student can withdraw contributions made to the plan to help cover the cost of their education expenses. The contributor can also withdraw their contributions.

Tax implications of RESP payments

A withdrawal of contributions is received without tax by either the student or the subscriber — only the income earned in the plan and any government incentives paid out are taxable. As such, EAPs received are reported on a T4A slip. When you report this income on your tax return, you may pay little or no tax after claiming deductions and credits available to you. However, if you have income from other sources and expect to pay income tax in a particular year, you may want to manage the amount of EAPs and non-taxable payments from your RESP.

For example, if you have very little income in one year but expect to pay income tax in the following year on income from a summer job and part-time work during the school year, it may make sense to take out more money as EAPs in the first year, subject to certain limits. When you have to pay income tax in the second year, you should consider withdrawing more of your non-taxable RESP amounts rather than EAPs to help minimize your income taxes. You can achieve this by specifying the amount of each type of payment when requesting an RESP withdrawal from your financial institution.

If you received any COVID-19 income support benefits in the year, such as the Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB), or Canada Recovery Caregiving Benefit (CRCB), attention should be paid to the amount of funds you take out as EAPs. This is because the Canada recovery benefits are taxable and can, in combination with the amount of taxable RESP income you receive, impact the amount of income tax you may have to pay in respect of the year.

Consider as well that the CRB will need to be repaid at the rate of 50 cents of benefit for every dollar of net income earned above an annual net income of $38,000 (excluding the amount received for the CRB). Depending on what other sources of income you have, you may want to ensure that any taxable amounts received out of your RESP do not bring your total annual net income over this threshold.

Keep in mind that students should use up the government grant money and income accumulated in the RESP during their studies — any unused grant money will have to be repaid to the government, and any remaining unused income may be subject to higher taxes. Remember that if you qualify to receive EAPs, you can use the money for any purpose, not just for tuition and textbooks.

Scholarship exemption

If you received a post-secondary scholarship (or certain similar types of financial awards), you might be exempt from having to include the funds as taxable income. The scholarship exemption applies to the first $500 and up to the total scholarship amount received, where certain conditions are met. It is available to qualifying students if the award is received in connection with their enrollment in certain educational programs (most common university and college programs would qualify). However, additional considerations exist where the scholarship or financial award received is related to a business or employment.

Your college or university will include the amount of scholarships and similar payments on the T4A slip that it issues for all scholarships, bursaries, and awards. Due to the scholarship exemption, you may be entitled to exclude all or a portion of the amount from your income. Therefore, make sure you get the benefit of the scholarship exemption where appropriate.

Moving expenses

Students may be able to deduct moving expenses when moving to attend a post-secondary educational institution full-time. To be eligible, a student needs to move at least 40 kilometres closer to the school. Students are ordinarily accepted as being in full-time attendance if the school regards them as such. Accordingly, they may need a certificate from the school declaring their full-time attendance in a particular academic year or semester.

Eligible moving expenses for education can be deducted only against taxable scholarships, bursaries, and research grants that students include in their income. This deduction is often limited since scholarships and bursaries are frequently exempt from tax, as discussed above, and research grant income can be reduced for tax purposes by considering research expenses.

A student may also be eligible to deduct moving expenses if they move a distance of at least 40 kilometres for employment, such as for a co-op placement or a summer job. In this case, eligible moving expenses may only be deducted against income earned in the year from that employment source.

Students who incurred eligible moving expenses both to attend an educational institution full-time and to be employed (e.g., on a part-time basis) can deduct the moving expenses up to their income for the year from taxable scholarships, bursaries, and research grants, and their employment income earned at the new work location.

Generally, unused moving expenses may be carried forward to future years and deducted against the corresponding income type — that is, eligible moving expenses for education may be applied against taxable scholarship and research grants, and eligible moving expenses for work may be applied against employment income in a future tax year. However, students are generally not permitted to deduct moving expenses carried forward against employment income earned from an unrelated job they started after completing their studies.

Don't miss out on tax-saving opportunities for students

Funding post-secondary education can be costly. However, if properly claimed, the tax breaks targeted specifically to students can help relieve some financial burdens. If you are currently enrolled in college or university or plan to enrol in the future, BDO can provide additional insights on how to fund post-secondary education in the most tax-efficient manner.