Skip to main content
tax matters

There are a lot of movies out there with predictable endings. The good guy comes out victorious, marries the girl, and the bad guy is the loser. Predictable.

Likewise, there are a number of arrangements designed to provide tax relief in the form of donation tax credits while helping parents pay for the cost of their kids' education. You'd figure that the organizers of these arrangements, and the parents who participate in them, would figure out how the movie is going to end - and it's not good.

Let me share one parent's tale.

The Story

On Feb. 24 of this year, the Tax Court of Canada handed down a decision in the case Coleman et al v. The Queen. The taxpayer, Richard Coleman, had been presented an arrangement that would help to pay for the cost of his son's university education in a tax-effective manner (or so he thought).

Here's how it worked: An organization called the National Foundation for Christian Leadership (NFCL) was registered as a charitable organization that provided bursaries, scholarships and awards to qualified students at certain Canadian colleges and universities. Students would qualify for financial assistance if, in addition to meeting certain criteria, they solicited donations for NFCL. A student would become eligible for bursaries of up to 80 per cent, and scholarships of up to 20 per cent, of the donations solicited.

More about RESPs:

  • Balancing RESPs, RRSPs and TFSAs
  • Having kids? Pull out the wallet and get set to invest
  • Put a few RESP dollars under the tree
  • Saving for junior's higher education?
  • Why RESPs are essential
  • Baby goes to university for $137,013

Mr. Coleman's company, Titan Construction Contractors Ltd., made donations to NFCL with the belief that Titan would receive tax relief for these donations and his son would then receive financial assistance from NFCL to help pay for university.

The problem? The Canada Revenue Agency disallowed the donation claimed by Titan. It's a common story. If you make a donation with the expectation of receiving some benefit in return, the taxman may determine that you have not made a "gift." All or part of the donation amount may be ineligible as a charitable donation. So, Titan was denied a deduction for the amount paid to NFCL.

To add insult to injury, the amount donated by Titan was considered to be a taxable benefit. The taxman determined that, if the amount paid out of Titan was not considered to be a legitimate donation, the payment of the amount out of the company became a taxable benefit to Mr. Coleman. Much like taking additional salary.

Where is the best place to put your money right now? Let us know what you think and why.

The Solutions

What's the prize parents are chasing when they enter into these types of arrangements? Simple: Tax relief for the cost of a child's education. It's possible to accomplish this with lower-risk ideas. Consider the following options:

Pay your child a salary. If you own a business, consider paying your child to work in that business. The amount you pay to your child will be deductible to your business if the amounts paid are reasonable. Further, your child should be able to earn between $15,000 and $20,000 on a tax-free or low-tax basis thanks to the basic personal amount plus the tuition, education and text book tax credits. Not a bad deal: A deduction to your business and tax-free income to your child. This is what Mr. Coleman was trying to achieve.

Lend money to your child. If you own a corporation, your company can lend money to your child to pay for school. The amount will be taxable to your child under the shareholder benefit rules, but if your child has little or no other income, he should pay little or no tax on that benefit. Later, when your child graduates from school and has the money to make repayments, those loan repayments will be deductible by him.

Pay for babysitting or a move. It's possible to pay your child who is 18 or older to look after his siblings who are 16 or younger, or to help in a move. As long as you are otherwise entitled to claim child care or moving expenses, these amounts will be deductible by you and your adult child may pay little or no tax on the amounts if he has little or no other income. These funds can then be used to help pay for postsecondary education.