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TAXFlash News from IncomeTaxCanada.net
:: University tuition and room & board fees can result in tax-savings for parents or students if they work together when filing tax returns
:: The Waltons and Happy Days were television shows in my day that depicted fully-functional families where all members worked together for the common good. Mom and Dad were always there for the kids and, conversely, the kids were always willing to lend a helping hand when asked. Real life experience tells us otherwise but in the income tax world it is possible for parents and their children to help each other out a little bit. Consider a situation where a child attended a post-secondary institution during 2002. Where a qualifying educational institution is involved, our tax system provides fairly generous credits for the cost of tuition plus education amounts based on whether the student attended school on a full-time or part-time basis. In the case of full-time attendance, the education amount is equal to $400 per month or part month in the calendar year – this figure changes to $120 per month where attendance is part-time. The first thing to understand is that the tuition and education credits belong to the student regardless whether the student or a parent actually paid the cost. This means that it is the student who must first claim the tuition and education credits. Furthermore, because they are tax credits and not deductions, the real “cash saved” value of tuition and education amounts is the same for everyone regardless what tax bracket the claimant is in. Simply put the tax saving created by claiming the allowable credits is the same for student and parent alike. Let’s look at how parents and students can effective use the tax system to benefit one another. Consider two general situations: the more common case where a parent pays the cost of tuition and the less likely case where the student pays for tuition. In each situation the approach depends on whether or not the student has taxable income in the year. A. Where a parent paid the cost of tuition: (i) If the student has no taxable income in 2002, the lesser of $5,000 and the total tuition fees and education amounts can be transferred to a parent. The transfer of these amounts will serve to save the recipient parent tax either by increasing a tax refund or reducing a payable. The effect of such a transfer is a tax saving to the parent who paid the tuition fees in the first place. Sounds fair to me. (ii) If the student earned taxable income during the year, the student must first claim as much of the available tuition and education amounts as are needed to eliminate their taxable income. In this situation, the student should calculate his/her 2002 income tax return with and without the benefit of the tuition and education amounts. The difference in outcome between these two scenarios is the tax benefit the student received. If the game plan is for the student to help fund the tuition cost, this is the amount the student should pay to the parent who paid the tuition fees on behalf of the student. Only after eliminating their taxable income can the student transfer an amount to a parent. The amount that can be designated for transfer to a parent is limited to the lesser of the total tuition fees and education amounts and $5,000 minus the amount needed by the student to eliminate his/her taxable income. Obviously, for amounts transferred the parent will receive the tax benefit directly on his or her income tax return. (iii) If after eliminating taxable income and transferring the maximum amount possible to a parent there is still a balance remaining the student can carry the remainder forward for claim in a future year. In this case, when the carried-forward amount is claimed, the student could perform a “with and without” calculation to determine the value of the tax benefit and a payment could then be made to the parent who footed the bill. B. Where a student paid the cost of tuition: (i) Where the student has no taxable income it’s quite common for the student to choose not to transfer any available amount to a parent. Tuition and education amounts not transferred in the year can be carried forward for use in a future year so this seems to be logical – a kind of “I paid for it and, therefore, I should benefit from it” approach. The problem I see here is that the student is forced to wait to receive the tax relief until such time as he/she becomes taxable. With a university degree taking at least four years that could be some time down the road. I don’t imagine things are much different these days, but I certainly wasn’t flush with cash during my university experience. So here’s my solution for students to get their hands on the tax saving today – why not transfer the tuition and education amounts to mom or dad anyway then have them write a cheque to the student for the amount of the tax saving? The parent beneficiary will need to calculate their income tax with and without the benefit of the transfer to determine the amount of income tax saved. Following this approach the student will realize the cash saving on part or all of their tuition and education amounts right now without the need to wait for years to come. Mom and dad haven’t lost anything because they didn’t have the benefit of the tax credit in the first place. If you and/or you’re parents have already filed 2002 income tax returns, all is not lost – you can still file a request to amend the subject returns. It’s best to use form T1ADJ to request an amendment and you’ll need to attach a completed Schedule 11 (both federal and provincial) to process the change. (ii) If the student has taxable income, then the student must first claim as much of the available tuition and education amounts as are needed to eliminate their tax liability. Any unused amount should then be transferred to mom or dad. The same approach described above can then be used to realize the cash saving today rather than waiting for tomorrow. If parents and students work together it’s possible to make use of most, if not all, of the tuition and education amounts available to the student here and now. Why wait for happy days when they could be had right now?
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney