Tag Archives: education

Should I Wait to Claim My Tuition Fees Until I’m Earning More Money?

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This question appears often on tax and finance chat boards in March. Tax credits and deductions are a bit bewildering the first time a person uses them. Some, like the RRSP deduction, have more value if they are used when a person is in a high tax bracket. Others create the exact same savings whether they are claimed by a person in the lowest tax bracket or in the highest tax bracket. So should someone wait to claim their tuition, education and textbook amount until they are in a higher tax bracket when they are earning more money per year?

No.

The amount you can claim because of tuition, education and textbooks will create the exact same dollar savings whenever you claim it.

The tuition, education and textbook amounts reduce your actual tax payable. So if you earned $20 000 or $200 000 or even $2 000 000 last year your tuition costs will give you back the exact same amount of money.

The amount you can claim for tuition fees, textbooks and other monthly education expenses does not reduce your taxable income. It only decreases your tax payable.

Is The Question Even Relevant?

In fact, the question isn’t even worth asking:

The Canada Revenue Agency gives you no choice, so the question is irrelevant. The tuition costs and education amounts are automatically applied to reduce your federal tax payable to 0.

If your tuition and education amounts are larger than what you need to reduce your tax to 0, then they are automatically carried forward and applied against your next income tax return. They continue to be carried forward and applied until they are used up.

The Rules

You must first claim your tuition and education and textbook amounts on your own tax return.

By completing Schedule 11, either by hand yourself or using a tax computer program, you will see if you have any tuition, education and textbook amounts left over after you have reduced your tax payable to zero.

If you have not used up all of your tuition, education and textbook amounts, you can transfer ($5000-the amount you did use) to one of the following people for them to use to reduce their tax payable for this tax year:

  • your spouse
  • your common-law partner
  • your parent
  • your spouse’s parent
  • your common-law partner’s parent
  • your grandparent
  • your spouse’s grandparent
  • your common-law partner’s grandparent

If there is still more tuition, education and textbook amount left, then it will be automatically carried forward for you (and only you) to use to reduce your tax payable in future years.
To make a transfer the student must

  • complete Schedule 11
  • complete the transfer part of the T2202A (or other) form that was received from the school

What If I Don’t Tell the CRA About My Tuition Costs Until Later?

Don’t waste your time trying to game the CRA. You’ll lose and it gives you no benefit anyway. No matter when you apply your tuition and education amounts you get the exact same number of $$ back.

Getting your money back in the future actually results in you losing money (if there is even the slightest inflation in prices each year) because $1 in the future is worth slightly less than $1 now. (I guess if there was deflation that might not be true, but we haven’t experienced deflation in my lifetime.)

In most cases, your tuition costs are reported on a T slip called the T2202A. You get a copy from your school. The CRA *also* gets a copy. Eventually, they will match the slip to your account and they will know which year you earned the right to claim the reduction in tax payable. They will not necessarily immediately apply it and send you a refund cheque, however. They don’t give away money if they don’t have to. After all, you might not have claimed your savings because you generously wanted to give the government some of your money just out of the kindness of your heart.

You can apply to properly claim that amount against the year it should first have been reported and claimed by filing a T1-ADJ. You will likely get some interest as well as your proper refund when it is applied. The interest must be claimed as new income on your next tax return.

(My relative did this when he discovered he had forgotten to claim tuition for a part-time continuing education college course until three years after the fact. He received $5 in interest and had to report that amount and get taxed on it the next year. It was worth it, though, because he received over $100 in a tax refund which of course did not have any tax owing on it.)

How Else Can I Use Up My Education Amount and Tuition Credit?

If when you report your tuition and education amounts for the year you have an unused amount, you can also transfer some of that amount, up to ($5 000 – the amount you used), to an acceptable person such as your parent, your spouse or common-law partner, or grandparent. They can then use the value to reduce their own tax payable.

(This is based on the belief or hope that your parent, spouse or grandparent may be helping to pay for your education and therefore deserves to get some of the tax relief benefit.)

You do not HAVE to transfer any amount. Also, you can only transfer up to the limit.
If there is still more unused value it will be carried forward for you to use in the future. Unfortunately, you can’t transfer any of it in the future to someone else.

(If you pay additional tuition and continue your education the next year, however, you can transfer some of the newly earned credit, just not any of the carried-forward amount.)

My Company Paid for My Tuition. Can I Claim Anything?

Generally if you were working and your company paid for your tuition costs you cannot claim the tuition cost or the part-time or full-time monthly educational amounts. There is one exception: if your employer paid for the tuition but then reported that amount as part of your income. In that case, you need to check with your employer directly about whether there is any amount that you can claim.

The same rules apply if your parent’s employer paid your costs.

What If I Forgot To Report or Claim my Tuition, Education or Textbook Amounts In the Past?

You can’t just report these amounts on your current return. You have to file an adjustment to the return for the year you should have claimed the amounts.

For example, if you went to college in 2012 and forgot to report the amounts on your T2202A, you must file a T1-ADJ for 2012 to report the amounts. You can do this quite easily online if you have a Service Canada My Account.

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Did you feel a little flutter of alarm the first time you had to claim your education expenses? Do you think the CRA should increase the textbook amount? Please share your views with a comment.

Advantages and Disadvantages of Holding a Self-Directed RESP Account at a Discount Brokerage

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When you first start a Registered Education Savings Plan you usually don’t have much money in it. But if you are able to contribute enough each year to receive the maximum Canada Education Savings Grant, and especially if you have more than one child and you can contribute $2500 each per year, within a few years you may have over $10 000 in the account. That’s when many people begin to think about ways to maximize their returns and to resent the fees they often have to pay for mutual funds. One option to consider is opening a self-directed RESP online brokerage account so that you can choose GICs from a variety of places or invest in stocks, ETFs and mutual funds; this article lists some of the advantages and disadvantages of RESP brokerage accounts.

Pros for Holding your Children’s RESP at an Online Discount Brokerage

If you wish to invest in Guaranteed Investment Certificates, you are not limited to the ones offered by a single bank which may only offer low interest rates. For example, if your RESP is at BMO InvestorLine, you can buy GICs from over 10 financial institutions including Home Trust and Equitable Bank both of which often pay rates significantly higher than the major Canadian banks.

You can invest in a mutual fund which mimics a daily interest savings account. The going rate is usually slightly less than paid by online banks such as PC Financial and Tangerine. (For example 1.2% vs 1.3%.)

You can buy units of low fee Electronically Traded Funds, ETFs, that mirror the performance of major stock exchanges such as the TSX or the NYSE

You can usually select mutual funds offered by a large variety of financial institutions with no fee required for the purchase and no penalty for selling the fund after holding it for 90 days (no load funds.) If there is a specific fund you wish to invest in, though, be sure to check that the brokerage offers that fund before opening your brokerage account. Each brokerage offers slightly different investment choices.

You have total control over how the money is invested.

Making new contributions to the RESP is usually as simple as a typing a few numbers on a screen and clicking enter. (No more sitting through sales pitches disguised as contribution meetings at your bank.)

You can check the details of your account and its earnings almost any time. You do not have to wait for quarterly or annual statements.

You can arrange to have contributions made automatically to your account on a monthly or annual basis. (This is also true of RESPs held at banks and of group RESPs managed by private companies.)

Cons for Holding your Children’s RESP at an Online Discount Brokerage

Many brokerages do not allow you to apply for all of the matching government grant programs. If you are planning to apply for grants in addition to the standard Canada Education Savings Grant, CESG, check with the brokerage to find out whether it supports the desired program before opening an account.

You may need to have a large minimum balance to avoid paying annual fees. (There is at least one exception to this.)

No one will provide you with guidance or advice about what to buy.

You will have to choose how to invest your money and if you lose money because of your choices there is no way to recover it.

If you wish to invest in GICs you may find the minimum purchase amount is very large. For example, the minimum at BMO InvestorLine is $5 000 per GIC.

If you wish to invest in a daily interest savings account fund, the minimum purchase amount may be large. For example, at BMO InvestorLine you have to keep a minimum balance of $5 000 in the fund, or sell all of your units.

A mutual fund you wish to invest in may not be offered for sale by your brokerage. For example, no brokerage currently offers the Tangerine mutual funds. Check before you open an account.

Occasionally there may be a minimum investment requirement for a mutual fund. This tends to be set by the mutual fund company, such as Steadyhand, however, not usually by the brokerage. If it’s a concern, check before opening the RESP account.

You will usually have to pay a commission fee each time you purchase or sell shares of a company or units of an ETF. The commissions vary from about $7 – $10 depending on the brokerage. Some brokerages may waive the purchase commission for some or all ETFs.

If you are planning to use a dividend re-investment program for shares or stocks in the RESP, be aware that

  • Brokerage accounts offer a synthetic DRIP. You will only get a new share or shares if your dividend payment is enough to purchase one or more entire new shares of the company. You cannot buy fractional shares in a brokerage account.
  • Each brokerage has a list of stocks and ETFs that for which it offers a DRIP. You may not be able to DRIP all ETFs or all stocks. If this bothers you, check whether the stocks and ETFs you want to purchase are eligible for a DRIP before you open a brokerage account at that institution.

If you transfer in your RESP from another institution, you may or may not be provided with good information easily about how much of the plan comes from your contributions, how much from the government grant/s, and how much from earnings made by the investments. I strongly recommend you keep clear records yourself!

The brokerage usually does not have any mechanism to stop you from over-contributing to the RESP. You should keep accurate records yourself about your contributions and make sure you do not exceed the $50 000 limit per child. Also, it will not warn you if you are contributing more than is needed to get the matching CES grant for that year.

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Do you host your RESP at an online brokerage? Have you run into any other drawbacks that you’d like to warn us about? Please share your experiences with a comment.