Tax and studies

By Jennifer Horner
Illustration: Katy Dockrill

Canadian students have always had some form of tax incentives, and the last federal budget added a few more

The Canadian government supports post-secondary education and occupational training in the form of deductions or credits to students or supporting individuals. Traditionally this support has been in the form of credits for tuition, education and student loan interest, as well as a limited scholarship exemption for qualifying scholarships. In addition to these credits and exemptions, there are various other tax-assisted incentives such as lifelong learning withdrawals from registered retirement savings plans and registered education savings plans.

Recent enhancements have increased support to students, including the introduction in the 2006 federal budget of a textbook and transit credit and, more significantly, a complete scholarship exemption for qualifying scholarships. In the course of their studies, students may be awarded a scholarship, fellowship or bursary. The taxable amount of the award is dependent on whether the recipient is entitled to a scholarship exemption amount, as the award is taxed net of any such exemption. The scholarship exemption is a minimum of . The current law allows a student to claim up to $3,000 of exemption for these awards where the award is received in connection with the student’s enrolment in an educational program in respect of which the student may claim the education credit. The proposed change to the law would allow qualifying awards received in 2006 and subsequent years to be fully exempt from tax. The requirement to claim the education credit can be either in respect of the education credit for full-time students or for part-time students.

A little known exemption for scholarships and prizes, known as the arts production grant, is unchanged by these rules. Under the grant, an award to be used in the production of a literary, dramatic, musical or artistic work is included in income net of related production expenses.

The May 2006 federal budget proposed a textbook tax credit for post-secondary students. The amount of the credit is determined by reference to the number of months the student qualifies to claim either the full-time education credit or the part-time education credit. For a student eligible to claim the full-time education credit, the federal textbook credit in 2006 will be 15.25% (15.5% for 2007) of $65 for each month the student is in full-time attendance at a post-secondary institution ($79.30 for eight months of full-time attendance). The factor for part-time attendance is $20, or a credit of $24.40 for eight months of part-time attendance. It is proposed that any unclaimed textbook credit is available for carry-forward in the same manner as the education credit.

Starting with the 2006 taxation year, it is also proposed that individuals who regularly use public transit be entitled to claim the cost of eligible monthly passes for travel that occurred after June 2006. For example, if a monthly transit pass costs $100 and was purchased for each month of July through December 2006, the eligible federal tax credit would be $91.50 ($600 x 15.25%).

The CRA has accepted that fees for correspondence courses can qualify for the tuition and education credit where students are enrolled in qualifying courses at Canadian post-secondary educational institutions. However, the same is not true for tuition fees paid for attendance at universities outside Canada.

In order to claim a tuition credit for tuition paid to a university outside Canada, it is necessary for the student to be in full-time attendance at the university. This is a different requirement than that imposed on a student attending a Canadian post-secondary educational institution, where the test is whether the student is enrolled at the educational institution. The requirement of a student at a university outside Canada to be able to claim the education credit parallels that of a student at a Canadian educational institution, in that the student simply must be enrolled in a qualifying course.

The requirement for full-time attendance has been the subject of several court cases recently, where a student was enrolled in a distance-learning course offered via the Internet. In these cases, the university was outside Canada and the student was attending courses online, from Canada, and therefore was not physically present at the university outside Canada for the duration of the education. Most recently, in a 2006 Tax Court of Canada decision, Valente v. the Queen (2006 TCC 145), the appellant was successful in her appeal to claim tuition fees paid to an online university based in England. The decision states that the phrase “full-time attendance” is ambiguous as to whether physical attendance was required and allowed the taxpayer’s appeal.

This decision was a change from earlier decisions, Hlopina v. the Queen (1998 (2 CTC 2669), and Cleveland v. the Queen (2004 DTC 2199), both tax court decisions. In these cases the taxpayer was unsuccessful in arguing that physical attendance was not required to claim a tuition credit for fees paid to a university outside Canada.

With education from foreign universities increasingly available to Canadians via the Internet, it will be interesting to see whether there will be further jurisprudence in this area or whether there will be changes made to the legislation to clarify the ambiguity of the current legislation.

The disability supports deduction was introduced in 2004 in response to a recommendation made by the Technical Advisory Committee on Tax Measures for Persons with Disabilities. The purpose of the deduction is to reduce barriers to employment and education for persons with disabilities. The result is that certain expenses incurred for education or employment purposes are fully deductible in the calculation of income. As the disability supports deduction does not impose as stringent requirements as the disability tax credit, the result of these new provisions is that students who require the use of assistive devices to help with their studies, but are not severely restricted by their disabilities as defined for purposes by the Income Tax Act, may be able to claim related expenses.

A list of eligible payments for services and equipment is in the legislation. The list includes tutoring services for students with a learning disability, talking textbooks for students with a perceptual disability, voice-recognition software for students with a physical disability, as well as sign language services and real-time captioning services for deaf students and optical scanners and Braille note-takers for blind students.

The deduction is restricted to amounts paid for eligible devices and services, provided certain conditions are met, and is subject to monetary limitations.

This deduction is available only to individuals with disabilities, not to those who support them. However, the types of expenditures for services and equipment allowed by the disability supports deduction are also generally considered to be medical expenses. As such, these expenses can be claimed by a supporting person. An eligible expense can be claimed only once, either under disability supports deduction or the medical expense credit provisions. Because of the interactions between these measures, and amongst other measures in the act available to individuals with disabilities and supporting persons, careful consideration of the rules is required to receive the optimum tax benefit.

If you have no income, should you file a tax return? It is worth asking, as the answer usually is yes. Students should file a tax return, even if they have no income tax payable in the year, as they may be eligible for refundable tax credits. It is also a way to establish and keep track of carry-forward amounts, since the CRA will track these and provide carry-forward amounts with the student’s Notice of Assessment.

The largest carry-forward amounts for students are likely to be unclaimed tuition, education and textbook credit amounts. However, students can also carry forward moving expenses if they can’t be claimed in the year of the move. By filing a tax return in the year expenses are incurred, rather than waiting for the year in which a carry-forward could be claimed, it will be more likely that receipts and other documentation are readily available when determining a claim. However, such documentation should be kept as records of the tax return in which the carry-forward amounts are used.

Ontario, Manitoba and Quebec offer a property tax refund, and Ontario and Manitoba, a rent tax credit, for property tax and/or rent paid during the year. This credit is applied for by filing a tax return.

The GST credit applies to individuals over the age of 18, or those younger than 19 who are married or who are the parent of a child who lives with them. The application for this credit is on the tax return form, and payments are made quarterly to qualifying Canadian residents. In addition, there is a refundable medical tax credit, which will apply in certain circumstances.

Finally, filing a tax return when a student has employment income, self-employment income, net income from a research grant, rent from real property or royalties from an invention or a literary work, but does not have sufficient income to be taxable, will establish RRSP contribution room based on these sources of earned income. A student could then make an RRSP contribution based on his or her contribution and wait until a later year to deduct the contribution, or simply be able to take advantage of the contribution room by making an RRSP contribution in future years.

Jennifer Horner, CA, is an executive director with Ernst & Young in Kitchener, Ont.

Technical editor: Trent Henry, leader of international tax service, Ernst & Young in Toronto