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Tax Matters

Five tax benefits every student should learn Add to ...

It’s hard to believe that summer is almost over. You know summer is coming to an end when it’s time once again to prepare for that all-important educational experience: the World Scrabble Championships. Make no mistake, the competition is coming up, and the stakes are high. My neighbour, William, is hoping to take home the $20,000 (U.S.) grand prize when he makes the trek to Warsaw six weeks from now.

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If you’re really good at Scrabble, you can almost eke out a living – if you win every competition every year. William attributes his Scrabble acumen to his very thorough education in university, which opened his eyes, he says, to premium words such as “aureolae,” “qanat,” and “euripi” (my spell-check flagged two of these words as being unknown; that’s how good William is).

Is there a young person in your life who is off to college or university in the next week or two? You may want to share with them the career possibilities that their education can afford, and “Scrabble Master” is just one. No? Well, at least share with them some of the tax benefits available to students. Here’s a list:

1. Claim moving expenses.

A student can claim a deduction for the costs of moving to school (or home again) provided he earns income while in the new location. Your child should consider earning enough income during the school year, and again in the summer after moving home, to offset those moving expenses (plus enough to absorb the basic personal tax credit and his tuition, education and textbook tax credits too). Sorry, but you can’t claim those moving expenses on behalf of your child, even if you pay those costs. The usual rules for moving expenses will apply to your child.

2. Lend money from your corporation.

You can help to fund your child’s education by lending her money from a corporation you own. The loan will be included in her income, but she should pay little or no tax on that amount if she has little or no other income. In fact, given the basic personal credit and tuition, education and textbook tax credits, you may be able to lend your child up to about $20,000 without tax in her hands. Once she graduates and starts working full time, she can pay back that loan, and will be entitled to a deduction for the repayment, at a time when she is earning income and could use the tax savings.

3. File a tax return.

Many students don’t bother filing a tax return because they don’t earn enough to pay any tax. Bad move. By filing a tax return your child will create registered retirement savings plan (RRSP) contribution room if he has any earned income at all. When he graduates, he can then make contributions to an RRSP and save tax. Further, filing a tax return should entitle your child to a GST credit worth about $200 or more in cash once he has reached age 19. Finally, your province might offer refundable sales or other tax credits which could provide cash back to your child.

4. Claim tax credits.

There are a few tax credits available to students. In particular, a tax credit is available for tuition paid in the year, an education credit based on $400 a month of full-time ($120 for part-time) enrolment, and a textbook tax credit based on $65 a month of full-time ($20 part-time) enrolment. If your child doesn’t have sufficient income to claim all these credits, these amounts can be transferred to a spouse, parent or grandparent (to a maximum of $5,000 in total). Your child can also choose to carry these amounts forward for use in a future year instead. Your child can also claim a credit for interest paid in the year on student loans made under the Canada Student Loans Act, Canada Student Financial Assistance Act, or similar provincial law. Finally, make sure your child claims the public transportation tax credit where applicable.

5. Tax-free assistance.

Since 2007 it’s been possible to claim a scholarship exemption to effectively make scholarships, fellowships and bursaries tax-free. To be eligible for this exemption, the program of study has to qualify the student to claim the education amount (that tax credit I referred to above). The Canada Revenue Agency has published a reasonably good pamphlet, publication P105 – Students and Income Tax, which you can access online at cra.gc.ca for details on the scholarship exemption, among other things.

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