TaxMatters@EY – September 2023

Yiyun Chen and Lucie Champagne, Toronto

Students who recently went back to class probably don’t want to spend their downtime reading up on income tax rules. But the range and extent of tax relief available to them means that a little study in this area can really pay off. Not only can students stand to benefit from various deductions and credits, but some of the tax credits can even be transferred to parents or other family members — the people who often help pay for the student’s education.

Why students should file an income tax return

A student with low income and no income tax to pay might be reluctant to spend time filing a tax return. But it’s still a good idea even when it’s not strictly necessary.

Filing a return helps establish carryforward amounts that can be used in future years. For example, income from a part-time job can generate registered retirement savings plan (RRSP) contribution room for the future, allowing the student to contribute and claim a tax deduction in a future year when their income is higher. The amount of contribution room will be included on the student’s notice of assessment, so both the student and the CRA will have a record of it.

There are a number of refundable tax credits — such as the GST/HST credit,¹ the climate action incentive payment² and certain provincial tax credits in relation to rent or property taxes paid in the year — that will generate payments from the government. Although individuals do not need to apply to receive the payments for the GST/HST credit and the climate action incentive payment, a return must still be filed for the CRA to determine whether a student is eligible for the credits.

Students can access free tax return preparation software via the CRA’s website that will allow them to NETFILE their income tax returns, and they can also use the free MyCRA mobile app to access certain personal account information on a mobile device.

Student income and financial assistance

Students rely on several types of funding to cover their tuition and living expenses, and each type comes with different tax considerations.

Student loans and lines of credit

Borrowed money in the form of government loans or a line of credit from a financial institution may be used to cover tuition and living expenses. A non-refundable tax credit is available for interest paid on loans made under the Canada Student Loans Act, Canada Student Financial Assistance Act, Apprentice Loans Act and similar provincial laws. It’s important to note that the tax credit is not available for interest paid on a student line of credit.³

Unlike a number of the other education-related credits, this credit is not transferable. However, if the student (or former student) can’t use the credit in the year the interest is paid, it can be carried forward for up to five years.

Beginning on April 1, 2023, the federal government permanently eliminated the accumulation of interest for Canada Student Loans and Canada Apprentice Loans under the Canada Student Financial Assistance Program. However, individuals are responsible for any accrued interest before this date. Depending on the province of residence, interest may continue to apply to a provincial student loan.

Registered education savings plans

Parents who have established a registered education savings plan (RESP) for their children can use the income earned in the plan, as well as the capital and Canada Education Savings Grants (CESGs) paid into the plan, to pay tuition and certain education-related expenses, such as the cost of textbooks, rent and food.⁴

Broadly speaking, parents can contribute up to a lifetime maximum of $50,000 for each child, and there is no annual contribution limit. Contributions to an RESP are not tax deductible, but do earn income free of tax while in the plan.

The government may also provide a basic CESG equal to 20% of contributions, up to a maximum of $500 for each child per year ($1,000 if there is unused grant room from a previous year), up to a lifetime limit of $7,200. Families with modest income may be eligible for an enhanced CESG.

Amounts withdrawn from an RESP that were funded with contributions are tax free for both the parent and the student as a return of capital.

In contrast, if the amounts withdrawn are government grants or income earned on contributions and government grants — referred to as educational assistance payments (EAPs) — they will be included in the student’s income rather than the parent’s income. Assuming the student will have to pay virtually no tax on this income, due mainly to various non-refundable tax credits, it means pre-tax dollars are being used to finance education.⁵

It is generally more desirable to withdraw EAPs first to limit the grants that would need to be returned to the government in the event the student discontinues their studies. However, there are limits on the amount of EAPs that can be withdrawn from an RESP in the student’s first semester. The 2023 federal budget increased these limits. For more information, see “In case you missed it: recent changes to RESPs and RDSPs may affect you and your family” in the July 2023 edition of TaxMatters@EY.

It’s important to note that EAPs must be used to further a student’s education at the post-secondary school level — a requirement that is vague. Your RESP provider will ask for proof of enrolment before issuing an EAP. They may also provide a list of allowable expenses or ask for receipts for school purchases to prove the EAP is being spent on allowable education expenses. Administratively, the CRA does not expect providers to assess the reasonableness of each expense item, provided the EAP is below a certain threshold, which is indexed annually. For 2023, this threshold is $26,860.⁶

Lifelong learning plan

If an individual is working but plans to continue their education at a later time, they can consider contributing to an RRSP while employed to help finance full-time education or training.

Under the lifelong learning plan, eligible students may withdraw up to $20,000 from their RRSP, tax free, to finance full-time education or training for themselves or their spouse or common-law partner.

To qualify, the student must be enrolled in a qualifying educational program at a designated educational institution as a full-time student in the year of withdrawal or by the end of February of the following year. If certain disability conditions are met, the student can be enrolled on a part-time basis.

When an eligible student participates in the lifelong learning plan, they may make withdrawals until January of the fourth year following the year of the first withdrawal under the plan. However, the amount withdrawn in a particular calendar year cannot exceed $10,000, and the total withdrawals cannot exceed $20,000.⁷

An individual must generally repay the amounts withdrawn from their RRSP in equal instalments over a 10-year period.⁸ If the student fails to make the minimum repayment, the shortfall must be included in their income for that year.

Employment income

Employers should provide all employees with a TD1 form to help the employer calculate how much tax to withhold from the employee’s pay. Employed students should complete this form carefully and include tuition amounts to reduce withholdings from their pay.

A student who expects personal credits (e.g., basic personal amount, tuition) to be more than their total income for the year can check a box on page 2 of the form so the employer will not withhold any tax from the student’s pay.

Note that the amount of any credits carried forward from the prior year are not part of Form TD1. If you wish to reduce withholdings in the current year because you are carrying forward tuition related amounts or other credits that are not part of Form TD1, you must apply to the CRA using Form T1213, Request to Reduce Tax Deductions at Source.

A student who is an employee during the year is also entitled to claim the Canada employment tax credit.

Scholarships

If the student is fortunate enough to receive a scholarship, fellowship or bursary, not only is it great financial assistance but it’s also likely tax free.

Government student grants would generally be included here. Although “bursary” is not defined in the Income Tax Act, it’s the CRA’s longstanding position that the definition of bursary is broad enough to include almost any form of financial assistance that enables a student to pursue their education,⁹ including government student grants. For more information on government student grants, refer to https://www.canada.ca/en/services/benefits/education/student-aid/grants-loans.html.

Research grants, however, must be included in income, but related expenses, such as travel or fees paid to an assistant, may be claimed as a deduction against that income.

Loan forgiveness and no-interest loans

Provinces and territories offer various programs to ease the financial burden on students after their course of study, including no-interest loans and student loan reduction payments. The CRA has issued technical interpretations covering these types of programs and indicated that the loan reduction payments and the benefit received from no-interest loans were not taxable.¹⁰

Student expenses

Several deductions and tax credits can help students offset not only the obvious costs of tuition, but also some of the costs associated with studying away from home, like moving expenses.

Tuition and related tax credits

Federal and provincial personal tax credits are available to students for tuition fees and certain ancillary fees and charges, subject to some restrictions, paid to certain educational institutions for a particular calendar year.¹¹

The tuition tax credit is available federally and in most provinces and territories.¹² Certain provinces and territories also offer education and textbook tax credits, but the federal education and textbook tax credits were eliminated in 2017.¹³ Other costs, such as equipment and student fees, are generally not deductible or creditable.

Tuition tax credits may also be available if a student is studying full time at a university outside of Canada. To be eligible for this credit, one of the requirements is that the tuition fees paid are for a course that is at least three consecutive weeks in duration.¹⁴

Transfer of unused education-related tax credits

Many students don’t earn enough income to fully use these credits. In this case, for federal purposes, up to $5,000 of unused tuition credit can be transferred to certain close family members, such as a spouse or common-law partner, parent or grandparent, who can use the amounts in their own tax return (provincial amounts may vary). Any amounts not used by the student and not transferred can be carried forward and used — but only by the student — in any subsequent year. Because the carryforward period is unlimited, even if the student lives outside of Canada for a period of time, the unused balance of credits will be available to them once they return to live in Canada.¹⁵

Canada training credit

The Canada training credit is a refundable tax credit that is available to help cover the cost of up to one-half of eligible tuition and fees associated with training.

Eligible individuals who have either employment or business income may accumulate $250 each year in a special notional account which can be used to cover the training costs. The maximum accumulation in the account over a lifetime is $5,000.

To be eligible, the individual must be at least 26 and less than 66 years of age at the end of the year for which the claim is being made. The individual must be a Canadian resident throughout the year, file an income tax return, and have employment or business income that is within a specific range.¹⁶

The amount of the credit that may be claimed in each year is equal to the lesser of one-half of the eligible tuition and fees paid in respect of the year and the student’s balance in their notional account. For purposes of this credit, eligible tuition and fees must be levied by a Canadian educational institution. The Canada training credit claimed reduces the amount that would otherwise qualify as an eligible expense for the tuition tax credit.

The $250 amount may only be added to the student’s notional account each year if an income tax return is filed for the preceding tax year.

Child care expenses

Students can deduct child care expenses paid to allow them to attend school and, in the case of couples, the higher-income spouse or common-law partner may claim the deduction. This is an exception to the normal rule that requires the lower-income individual to claim the child care expense deduction. The maximum amount that can be claimed varies depending on the child’s age.

Moving expenses

For students who attend university at least 40 km away from home on a full-time basis, even if it’s out of the country, the related moving expenses may be deductible. However, the deduction can only be claimed against certain types of income.

A student who moves to attend school can only deduct the moving expenses from taxable scholarship, fellowship, bursary, certain prizes or research grant income. If the student moves back home or somewhere else for a summer job, the costs of that move can be deducted from income earned from the summer job, but not from employment income earned during the school year. A co-op student can also claim the expenses of moving back after a work semester.

If moving expenses can’t be deducted in the year, they can be carried forward to a future year and claimed against the same types of income. Unfortunately, parents cannot claim their children’s moving costs even if they paid for them.

For help in determining which moving expenses are eligible for deduction, students should refer to CRA Form T1-M, Moving Expense Deduction.

Other tax planning considerations

RRSPs, TFSAs and FHSAs, the benefit of compounding

The last thing a student is likely thinking about is retirement. But don’t dismiss RRSP contributions. Other than the lifelong learning plan discussed above, there are many more benefits to investing in an RRSP. Small contributions today can result in sizable capital sums many years down the road. And since there would likely be no immediate tax benefit from the contribution, remember that the deduction can be claimed in a later year when the student is earning sufficient income to benefit from the income deduction.

A tax-free savings account (TFSA) is another tool that allows individuals to set aside money tax free throughout their lifetime. Contributions to a TFSA are not tax deductible, but income earned in the account is generally tax free when withdrawn.

In addition, a tax-free first home savings account (FHSA) is a new type of tool intended to help Canadians save for a down payment on their first home. A FHSA has a blend of features from RRSPs and TFSAs, such as tax deductions for contributions and annual limits on the amounts of contributions. For more information, see “What's new for first-time home buyers?” in the October 2022 edition of TaxMatters@EY: Family Wealth Edition, and “Focus on Housing” in the February 2023 edition of TaxMatters@EY: Family Wealth Edition.

Accommodation

For students 18 and older living away from home, parents might even consider advancing them funds to purchase the house/condo in which they’ll live during their post-secondary education.

The gain on the eventual disposition of the property may be sheltered by the child’s principal-residence exemption. If rooms are rented to other students to help with carrying costs, a reasonable portion of expenses can be deducted from the rental income earned. But don’t claim capital cost allowance, since it will result in the loss of the principal-residence exemption. If funds are loaned interest free instead of gifted outright, any rental income may be attributed to the parent.

The student may also be eligible for the first-time home buyers’ tax credit where certain conditions are met, resulting in a non-refundable tax credit of $1,500.

To learn more about these and other personal tax-saving ideas, read our helpful annual guide Managing Your Personal Taxes: a Canadian Perspective.

1. The GST/HST credit is generally available to eligible individuals who are 19 years of age or older, or either have a spouse or common-law partner or are a parent living with their child. See CRA publication RC4210 — GST/HST Credit.
   
2. The climate action incentive payment is available to eligible individuals who are 19 years of age or older, or either have a spouse or common-law partner or are a parent living with their child. This tax-free benefit is available for the full 2023-24 payment period (i.e., quarterly payments from April 2023 to January 2024) to individuals who are resident in Alberta, Ontario, Manitoba or Saskatchewan and, beginning in July 2023, to eligible individuals who are resident in New Brunswick, Nova Scotia, Prince Edward Island or Newfoundland and Labrador. See CRA publication RC4215 — Climate Action Incentive Payment.
   
3. See CRA document 2001-0074215.
4. An RESP may be used to fund a child’s, grandchild’s, spouse’s or partner’s, or even the student’s own education.
5. However, in your planning consider that this strategy could impair the transfer of tuition credits to a parent, depending on the amount of RESP taxable income that is paid out to the RESP beneficiary.
6. Also, see Registered education savings plan (RESP) Bulletin No. 1R3, for a list of expenses the CRA considers reasonable and unreasonable.
7. The $20,000 limit applies each time an individual participates in the lifelong learning plan. A new participation period may begin in the year following the year the withdrawn amounts have been fully repaid to the individual’s RRSP (or have been included in income).
8. The first repayment is due no later than 60 days after the fifth year following the first withdrawal.
9. In CRA document 2017-0735391E5, the CRA stated that payments under a particular tuition waiver program would be considered a bursary.
10. CRA documents 2018-0777321I7 and 2018-0775971E5.
11. Students enrolled at post-secondary educational institutions in Canada (e.g., university or college), or at educational institutions in Canada certified by the minister of employment and social development to provide courses to develop or improve an individual's skills in an occupation, may be eligible to deduct tuition fees and certain ancillary fees and charges (e.g., examination fees), provided they exceed $100 per educational institution. Also, where certain conditions are met, fees paid for advanced-level courses (i.e., courses at the post-secondary level) to a Canadian private high school may qualify for the tuition tax credit (see CRA document 2019-0815841E5).
12. The tuition tax credit is not available in Saskatchewan, Ontario or Alberta.
13. Unused federal education and textbook tax credits carried forward from 2016 and earlier years may be claimed in 2017 and later years.
14. Subparagraph 118.5(1)(b)(i) of the Income Tax Act. In certain cases, the CRA may nevertheless consider a course of less than three consecutive weeks to meet the tuition tax credit requirements in situations factually similar to Fortnum v The Queen, 2018 TCC 126. Also, see Income Tax Folio S1-F2-C2, Tuition Tax Credit, paragraph 2.31.1.
15. However, if a student became a nonresident of Canada for tax purposes during the time they studied abroad, they cannot accumulate tuition tax credits during that period, and thus cannot claim those credits after they return to Canada. See Marino v The Queen, 2022 FCA 115.
16. For example, to calculate the 2023 balance in the notional account, an eligible individual must have employment or business income that is at least $10,994 in 2022 and have net income in the preceding year that does not exceed the top of the third tax bracket (i.e., $155,625).