As the summer starts to wind down, students returning to their post-secondary institutions, and those just starting post-secondary education, must focus on the details of the upcoming school year: finding a place to live, choosing courses, and — perhaps most important — arranging payment of tuition and other education-related bills.
For many years post-secondary students (and their parents) have benefited from an “assist” through our tax system, which provides deductions and credits for some of the many costs associated with obtaining a post-secondary education. Starting with the 2016-17 academic year, however, some of those deductions and credits will no longer be available.
The biggest cost of post-secondary education is, of course, tuition, and the tax credit provided for eligible tuition costs continues to be available for the upcoming, and subsequent, academic and taxation years. Any student who incurs more than $100 in tuition costs at an eligible post-secondary institution, which includes most Canadian universities and colleges, can claim a non-refundable federal tax credit of 15% of such tuition costs. The provinces and territories also provide students with an equivalent provincial or territorial credit, with the rate of such credit differing by jurisdiction.
At both the federal and provincial levels, the credit acts to reduce tax otherwise payable. Where, as is often the case, a student doesn’t have tax payable for the year, any credits earned can be carried forward and used in a subsequent year, or transferred, for the current year, to a spouse, parent, or grandparent.
For several years, post-secondary students have also been able to claim two other federal tax credits – the education tax credit and the textbook tax credit. Both, unfortunately, are being eliminated.
Both the education and textbook tax credits are set at a fixed amount, irrespective of any actual expenditure made by the student. For the 2016 tax year, the federal education credit is equal to $60 for each month of full-time attendance and $18 per month of part-time attendance. The amount of federal textbook tax credit claimable is $9.75 per month of full-time attendance and $3.00 per month of part-time attendance.
As is the case with the tuition tax credit, the provinces and territories provide education and textbook tax credits based on the same criteria, but with the amount of the credit varying by jurisdiction. Both the federal and provincial/territorial education and textbook tax credits are non-refundable, meaning that they apply to reduce federal or provincial/territorial tax otherwise payable, but cannot create or increase a tax refund.
In this year’s federal Budget, it was announced that the federal education and textbook tax credits would be eliminated, effective as of January 1, 2017. Consequently, post-secondary students will still be able to claim those federal credits with respect to the first term of the 2016-17 school year (September to December 2016) when filing their return for 2016 in the spring of next year. However, no federal education or textbook credit will be available to be claimed for any school term which starts after December 31, 2016.
The reality for most Canadians pursuing post-secondary education is that, notwithstanding parental savings or student summer jobs, most students will have incurred some debt to pay for the cost of that 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), the student can claim a tax credit for both federal and provincial tax purposes for interest paid on those loans, and that credit is unaffected by the recent changes.
It’s 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.
Most government student loans are provided on an interest-free basis while the student is in school. However, interest starts to be levied, and repayment of the principal amount of the loan must begin, usually 6 months after the student graduates. Consequently, last year’s graduates will soon have to arrange a repayment schedule for their outstanding student loans.
It’s also likely that they will receive an offer or offers from financial institutions to provide financing which will allow the graduate to consolidate all education-related debts into a single loan or line of credit, usually at a preferential interest rate. While such offers can be tempting, graduates should, when determining the best structure for their education loans, remember both the fact that interest paid on private sources of financing will not qualify for any tax credit and, equally important, that 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.
In other words, a student who takes out a line of credit or loan to consolidate all education-related debt will lose the ability to claim any federal or provincial tax credit on the portion of that debt that was originally a government student loan.
Obtaining a post-secondary education never has been — and likely never will be — an inexpensive proposition. And, while some of the tax breaks available for those who are pursuing such an education are being eliminated, it’s well worth claiming, to the maximum extent possible, those that remain. As well, students can often take advantage of tax deductions or credits which, while not specifically targeted for them, are often available for the kinds of expenditures made by students. Those kinds of claims, which would include the moving expense deduction and the tax credit for public transit costs, are summarized in the Canada Revenue Agency publication Students and Income Tax.
