Cash-strapped students have a number of ways they can reduce their taxes now – as well as in the future – says CIBC’s tax and estate planning expert, Jamie Golombek in the third of a series of tax tips this month.
“Taxes may not be top of mind for many students, but one quick lesson can help them put a little bit of extra cash back in their pocket,” notes Mr. Golombek. His report, called “A teaching moment: Tax tips for students” identifies several strategies students should consider, including the benefits of filing a tax return – even if they don’t owe any tax.
Post-secondary scholarships, fellowships and bursaries are exempt from tax, including research-based programs as long as they lead to a college or CEGEP diploma, or a bachelor, masters or doctoral degree. However, notes Mr. Golombek, post-doctoral fellowships are not tax exempt.
Report only the EAP portion of RESP withdrawals
“Students should be aware that if they received funds from an RESP in 2010, only the educational assistance payments (EAPs) are taxable,” says Mr. Golombek.
He goes onto explain that EAPs consist of the income, growth or Canada Education Savings Grants (CESGs) paid out to the student from an RESP and are reported on the student’s T4A slip. Any withdrawals from the principal contributions to the Plan are tax-free.
Moving expenses (line 219)
“Students who move more than 40 kilometres from home to attend post-secondary education on a full-time basis, or move more than 40 kilometres from their school address to start a job or a business including summer employment, may be eligible to deduct their moving expenses,” says Mr. Golombek pointing out another way students can reduce their taxes.
Deductible moving expenses include travel expenses such as gas, meals and any accommodation en route, as well as actual moving expenses, such as packing, hauling, in-transit storage and insurance.
He also notes that, “any unclaimed moving expenses can be carried forward to another year.”
Interest on student loans (line 319)
Students can claim the interest paid on loans for post-secondary education and carry forward any unclaimed amounts for five years. His report explains that in some instances, it may make sense to pay off a student loan with a lower-interest rate line of credit, but students need to do the math first, as they will give up the ability to claim the student interest tax credit by doing this.
Tuition, education and textbook tax credits (line 323)
Students can also take advantage of three non-refundable tax credits which include tuition fees paid for post-secondary education, education credits ($400 per month for full-time students for each eligible month of attendance, or $120 per month for part- time students), and the relatively new textbook credit (equal to $65 for each eligible month in school, or $20 per month for part-timers).
Transferring tuition (line 324)
Some students may find they don’t need to claim all of their tuition, education or textbook tax credits to reduce their income tax to zero. As a result, students may wish to consider transferring unused amounts to a parent, spouse or common-law partner (CLP), grandparent, or alternatively carry forward the unclaimed amounts to another tax year.
Canada employment amount (Line 363)
Student who had employment income in 2010 from a part-time or summer job can claim the Canada employment amount. This includes work-related expenses such as home computers, uniforms or supplies, which would not otherwise be tax deductible. For 2010, the Canada employment amount is the lesser of the student’s employment income in the year or $1,051. Multiply the lesser amount by 15 per cent to get the non-refundable Canada employment federal tax credit.
Public transit passes amount (Line 364)
Don’t forget that students who take public transit and purchase a monthly pass can claim 15 per cent of the total amount spent.
Filing a return
Mr. Golombek also advised that, “while there is generally no obligation to file a return if taxes are not owed, students may wish to consider filing a tax return for 2010 for a few reasons.”
First he points out, “if the student is at least 19, they should file a return to be eligible for the GST/HST credit, a tax-free quarterly payment to help individuals with lower incomes offset the GST/HST they pay. You must apply for the GST/HST credit each year, even if you received the credit the previous year.”
He goes on to say that another good reason to file a return is to get a refund of any tax withheld at source. If students had a part-time or summer job, typically their employer would automatically withhold some income tax. Since most students are in a non-taxable position owing, by filing a return, they will get back the amounts previously withheld at source.
Finally, “filing a tax return to report part-time or summer earnings will generate RRSP contribution room for use in future years. The RRSP contribution limit is based on 18 per cent of earned income from the previous year and there is no limit on how much RRSP contribution room can be carried forward.”
In conclusion, students can usually minimize, or eliminate, the tax they owe by taking advantage of an extensive number of tax benefits, deductions and credits during what are typically low-income years. It pays to capture as many of these tax-savings as possible.
Students can review the full report by Mr. Golombek by visiting cibc.com.
CIBC is a leading North American financial institution with nearly 11 million personal banking and business clients. CIBC offers a full range of products and services through its comprehensive electronic banking network, branches and offices across Canada, in the United States and around the world. You can find other news releases and information about CIBC in our Press Centre on our corporate website at http://www.cibc.com/.
For further information:
Kevin Dove, Senior Director, Communications and Public Affairs, 416-980-8835 or [email protected]