As summer starts winding down, post-secondary students will start thinking about choosing courses and finding a place to live during the coming academic year. Their parents’ attention will more likely be focused on the cost of that year, and the upcoming deadlines for payment of first semester tuition and housing costs.
Whether a student attends college or university, post-secondary education is expensive. Even those who cut costs as much as possible by living at home during their college or university years must still spend thousands of dollars on tuition fees and required textbooks. Where a student lives away from home, whether in residence or in rental housing off-campus, it’s realistic to budget a minimum of $15,000 annually for the combined cost of school and living expenses.
Fortunately for all concerned, the cost of post-secondary education can be offset somewhat by claiming the various tax credits which are provided through our tax system. At the federal level, a non-refundable tax credit equal to 15% of qualifying costs can be claimed by the student. A parallel credit is claimable at the provincial or territorial level, with the available percentage credit varying, depending on the province or territory in which the student lives and files an income tax return.
First, the bad news: although living costs—the cost of living in a student residence and purchasing a meal plan, or the cost of renting off-campus—is often the largest single annual expense incurred by post-secondary students, there is no tax credit or deduction available to help mitigate those living expenses. Since the student would have to have incurred costs for shelter and food in any case, such expenses are viewed as personal expenses unrelated to the student’s education and therefore not eligible for credit or deduction.
The good news, however, is that a non-refundable tax credit can be claimed for virtually all other education-related costs, including tuition, books, and most ancillary expenses—(e.g., examination fees or mandatory computer service fees which are levied as part of a student’s tuition). And, where a student can’t make use of the full credit available, that credit can usually be transferred to, and claimed by, a spouse, parent, or grandparent.
After the cost of food and shelter, the largest expense faced by post-secondary students is the cost of tuition, which can range from $4,000 a year to over $15,000. No matter what the amount, students are entitled to a non-refundable federal tax credit equal to 15% of their tuition bill. A parallel provincial or territorial credit can also be claimed, with the percentage credit ranging, in 2014, from 5.05% to 11.0%.
Both full and part-time university students can also claim the “education tax credit”, which is calculated as a fixed amount for every month of full or part-time attendance during the tax year. For 2014, the full time amount to be claimed on the federal tax return is $400 per month, while the part-time amount is $120 per month. The total amount claimed is then multiplied by 15% to arrive at the credit claimed on the federal tax return. As with the tuition tax credit, the provinces all offer an education tax credit, with both the amount and the conversion percentage varying by province.
The final “standard” deduction available to post-secondary students is the so-called “textbook amount”. The name is somewhat misleading, as neither eligibility for nor the amount of the credit depends on expenditures made for textbooks. Rather, the federal textbook amount is a fixed monthly amount (currently $65 for full-time and $20 for part-time students) which, like the tuition and education amounts is converted to a credit by multiplying by 15%, and which can be claimed by any student who is eligible for the education amount.
Non-refundable tax credits, like the tuition, education, and textbook credits outlined above, work by reducing the tax which the individual claiming the credits would otherwise have to pay. However, post-secondary students generally have relatively low income and consequently relatively low tax bills and so may not be able to “use up” all of their available credits in a single tax year. Two solutions are possible. First, the student may transfer the unused credit to a spouse, parent, or grandparent (and it’s not necessary for the parent or grandparent to have actually paid the tuition bill in order to claim the transferred credit). Second, the student can keep the excess credit and claim it in any future tax year, when income and therefore the resulting tax payable will presumably be higher. There are some restrictions and limitations on the transfer of student tax credits, but generally speaking, most students should be able to transfer credits to parents or grandparents without difficulty.
No matter how diligently parents save for a child’s post-secondary education or how lucrative a student’s summer jobs are, today’s reality is that most students will have incurred some debt to pay the cost of post-secondary education—sometimes a lot of debt. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or the equivalent provincial program), interest paid on those loans after graduation can qualify for a tax credit, at both the federal and provincial levels. It is important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (for example, through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit. In today’s low interest rate environment, a financial institution may offer (usually at the time repayment of government student loans must begin) to consolidate all of a student’s outstanding debt at a preferential interest rate. Post-secondary graduates should consider such offers carefully, as any mingling of government student loan balances with private sector lending will disqualify the student from claiming a tax credit for interest paid on that government student loan.
While the long-term benefits are undeniable, obtaining a post-secondary education never has been and likely never will be an inexpensive proposition. The costs involved, can, however, be kept to the minimum possible by ensuring that every tax “break” available, during both the post-secondary years and thereafter, is claimed in the most tax-efficient way possible.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.