Perhaps the first lesson kids should learn at university is to keep receipts and detailed expense records. Overlooking this point may mean losing valuable tax deductions and credits for them and you.
Tuition and various other fees qualify for federal and provincial personal tax credits. There are also $400 federal education and $65 textbook credits for each month of full-time attendance.
Parents or grandparents may claim up to $5,000 of these amounts if the student doesn’t pay sufficient taxes to claim the full amount. Alternatively, the student may carry forward these amounts to a subsequent year if he or she expects to earn sufficient taxable income.
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For the first time, scholarships, fellowships and bursaries received in 2006 will be tax-free for a student entitled to claim the education tax credit.
A student attending a college or university away from home can also deduct moving and related expenses,
either in the year they occur or in the following one. They are deductible against income from employment, self-employment or grants earned at the new location if the move is at least 40 kilometres from home. A student can make a claim for each move but the relevant expenses cannot exceed the income from the new location.
Such expenses are not transferable to parents, regardless of who paid them.
Interest on student loans acquired under various qualified federal and provincial laws are eligible for tax credits but are not transferable either. If the credit can’t be used right away, the credit can be carried forward for five years.
Although distributions from Registered Education Saving Plans set up by parents are taxable in the hands of the student in the year they are received, assuming that the students’ taxable income is low, his education is essentially being financed by money that is taxed at a low rate or not taxed at all.
Distributions from the plan can be used for tuition and living expenses if the student is living away from home.
Parents can contribute to the RESP up to the year the student turns 20 at a maximum of $4,000 per year, with an overall limit of $42,000.
But what if your student is able to fund part of his or her education through part-time work and doesn’t require all of the funds in the RESP? If the parent has sufficient contribution room in his RRSP, he can transfer up to $50,000 of the RESP income to his or his spouse’s RRSP.
Otherwise, a parent can withdraw the original contribution free of tax, but is on the hook for regular taxes on the earned income, plus a special 20 percent surcharge tax.
A last but important recommendation is to have children file an income tax return. They may have little or no taxable income to report, but they will be building RRSP contribution room for later years. Plus, they can benefit from certain refundable tax credits such as the GST credit as well as certain provincial tax credits.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at fbc@fbc.ca or call 800-860-7011.
