Tax expert from KPMG in Canada walks through education-related credits and exemptions
This article was contributed by KPMG in Canada.
Now that the school year is in full swing, it’s a good time for financial advisors to delve into some taxing questions. If your client is a parent with one or more children in university or a post-secondary institution, they’ll no doubt appreciate some practical, cost-saving advice. There are several tax benefits available to parents and students that could translate into real savings.
My first recommendation is to ensure your clients and their offspring both file their taxes during these academic years. Otherwise, they could lose out on the relief available to them that can add up at tax time.
A number of noteworthy tax credits and exemptions are worth considering.
Post-secondary tuition
Tuition fees paid for courses at a Canadian university, college or other post-secondary educational institution can qualify for a non-refundable 15 per cent Federal Tuition Tax Credit for 2022, and potentially a provincial tax credit.
This credit must first be claimed by the student on their taxes; however, a parent can claim some or all of the credit amount that the student can’t use once their taxable income has been reduced to zero through various credits and deductions. Otherwise, a student can carry it forward to future tax years.
Tuition isn’t the only school fee that can qualify for a tax credit. Other fees include the cost of books, library and lab charges, exam and application fees, and mandatory fees paid for health services, athletics and computer services.
Maximizing RESPs
Most advisors know that saving for a post-secondary education with a Registered Education Savings Plan (RESP) is a good way to save and receive government grants. If your client makes RESP contributions up to $2,500 per year, this will trigger a 20 per cent government grant of up to $500 per year, for a maximum $7,200 in a student’s lifetime. Don’t forget that your clients can invest even more into the plan beyond the amount that triggers the grant. These savings can be invested to grow on a tax-deferred basis, meaning taxes are only paid once the funds are withdrawn.
If you can’t decide which type of RESP to subscribe to, your best bet is to talk to an advisor. If you have more than one child, consider the advantages of a family RESP rather than an individual RESP. With a family RESP, education savings can be shared among all your children; whereas an individual RESP must be used by one, identified child. If in later years that child chooses not to pursue higher education, then your client will need to repay the government grant.
Advisors should also be aware that are two types of RESP withdrawals for post-secondary students. One is taxable, the other isn’t. The taxable amounts include income earned in the RESP and from government grants. Non-taxable amounts are the contributions made to the plan. Student with little or no taxable income may want to withdraw the taxable amounts from the RESP to take advantage of their low tax rate.
Other education-related credits and exemptions:
Student loan interest: Students and former students who receive loans through registered federal loan programs, such as the Canada Student Financial Assistance Program, can claim a 15 per cent federal tax credit – and potentially a provincial tax credit – on the interest they interest paid in 2022.
Moving expenses: Moving expenses can qualify as a deductible expense if a student is moving more than 40 kilometer to study full-time in Canada or abroad, or if they relocate to start a job (including a summer job) or a business.
Scholarship recipients: Not that many years ago, scholarships, fellowships and bursaries were considered taxable income or only a small tax exemption was applied. That changed in 2006 for provinces and territories outside Quebec. This income is now generally tax-free for qualifying full-time post-secondary, elementary and secondary school study. For part-time study, some exemptions on scholarships are also available, although usually limited to the cost of tuition and course materials.
Extra deductions for students with children: Full-time and part-time students with children at home may be eligible for additional childcare deductions above the general limits. This will depend on the age and number of children in their care. Parents should look into eligible deductions that apply to their personal situation before tax time.
RRSPs: There’s also a federal “Lifelong Learning” program that allows students to make withdrawls from a Registered Retirement Savings Plan (RRSP) to cover their own or their spouse’s educational costs. Up to $10,000 per year in withdrawals can be made over four-years, to a maximum of $20,000. These amounts can be repaid in equal instalments over a 10-year period following graduation. This is especially helpful to mature students who have accumulated RRSP savings.
Having a tailored plan to help your client manage the significant financial costs of an education will make things feel far more manageable. It also makes good sense to think about taxes ahead of time and ensure they don’t miss out on the potential savings.
Aaron Gillespie is an Enterprise Tax Partner at KPMG in Canada. More information on tax strategies and savings for students, families and businesses can be found within KPMG in Canada’s online guide, “Tax Planning for You and Your Family 2022.”
