How important is it for your child to enroll in a postsecondary education? Before you answer that question, consider the story of Calvin Robinson, 19, who was arrested in June in Spokane, Wash. As it turns out, Mr. Robinson was arrested for allegedly trying to make counterfeit $10 bills - in the washroom at a local mall, using a printer he had just purchased for $100 (U.S.). You see, he needed an electrical outlet to operate the colour printer, with which he made a sheet of uncut, poorly made copies of a $10 bill. His intention was to print $90 worth of bills to buy some marijuana.
This is precisely the kind of bad idea I hope that a postsecondary education will protect my kids from (I want my kids to think of using an industrial printer when they print counterfeit money). So, if you've got a child heading off to postsecondary school this year, congratulations, I expect your child will make smarter decisions. And there are some smart decisions related to your child's tax planning that can help too. Let me share some of those today.
1. Withholding tax.
As a student, your child may not be taxable thanks to his low income. If this is the case, he should ensure that no withholding tax is deducted from any pay he earns. This can be done by completing form TD1 for his employer. Why bother? It'll improve cash flow because your child won't have to wait until next April to get a refund of any tax he paid. Most students should be able to earn upward of $16,000 before they become taxable, thanks to the basic personal and other tax credits available.
2. Scholarships and so on.
The 2006 federal budget made postsecondary scholarships, fellowships and bursaries tax free. In addition, scholarships to attend elementary and secondary schools are now fully exempt from tax, thanks to the 2007 federal budget. So, be sure your child doesn't report these amounts as taxable, as in the past.
3. Research grants.
Students who are given research grants, which are taxable, are able to deduct expenses for travel, lodging and fees paid to assistants.
4. Tuition and education credits.
Your child's university or college should provide form T2202 or T2202A as evidence of enrolment and tuition paid. This will entitle her to a tax credit for tuition and an education amount equal to $400 a month of full-time attendance in school or $120 for part-time. If your child doesn't need the credits to reduce taxes to zero, she can transfer up to $5,000 of these costs to a supporting spouse, parent or grandparent, or she can carry them forward for use in a later year.
5. Textbook and ancillary costs.
A tax credit for books, student fees, parking and equipment is available (this was new in 2006), based on $65 a month for full-time students or $20 a month for part-time. Schedule 11 should be attached to your child's tax return to claim this, and the tuition and education amounts I spoke about.
6. Student loan interest.
Make sure your child claims a tax credit for interest paid on qualifying student loans, which are loans made under the Canada Student Loans Act or similar provincial legislation. An official Canada Revenue Agency (CRA) or provincial slip should be issued to support the claim.
7. Moving expenses.
Your child can claim certain moving expenses if the move to school, or home again, is at least 40 kilometres. The deduction will be limited to the income earned in the new location, which can include taxable research grants, employment, and so on. So, a part-time job at school may be a good idea to enable this deduction.
8. RRSP deductions.
Make sure that your child files a tax return next spring for the 2008 tax year if he had any earned income at all, even if he won't owe tax. Why? This will create contribution room for a registered retirement savings plan, which can be used in later years to save tax. If your child does contribute to a registered retirement savings plan, he can save the deduction for a future year when his income is higher.
9. Child care costs.
A student (or his spouse) may be entitled to claim a child care deduction where at least one spouse attends school full-time or part-time.
10. Rent costs.
Ontario and Manitoba offer refundable property tax credits for rent paid, and Quebec provides a property tax refund, which is similar.