Students heading back to college or university this week likely are not
thinking about income tax deductions, but they should be aware of certain tax
breaks they are eligible for, some of which can be transferred.
The rules can be somewhat tricky and may lead to unintended and severe tax
consequences as a tax case decided last month illustrated. Before getting to the
case, here are some rules governing tuition and education tax credits.
Non-refundable tax credits are available for post-secondary tuition fees.
Education credits are also available for each month of full- or part-time
attendance at school.
Many students don't need all of the credits to reduce their tax to zero and
can either carry forward unclaimed amounts indefinitely or transfer them to a
spouse, parent or grandparent. Interestingly, the recipient does not need to be
the person who paid the tuition.
Amounts carried forward from previous years that are not completely used by
the student in the current year can be carried forward by the student but cannot
be transferred in any future year. Amounts carried forward must be used before
the current year's credits are applied. Only unused amounts from the current
year can be transferred to a spouse, parent or grandparent, to a maximum of
$5,000 minus the amount claimed by the student. Students may choose to carry
some or all of the current year's amount forward. Unused tuition and education
amounts can be transferred to only one person.
The student completes Schedule 11, Tuition and Education Amounts from the tax
return package to determine how much they will use in the current year and how
much can be carried forward and/or transferred to a spouse, parent or
grandparent.
The Tax Court of Canada addressed these convoluted technical rules and
demonstrated a clear unfairness in a case last month, that involved a taxpayer
attempt ing to claim tuition and education amounts transferred from his deceased
son. The son, who was enrolled in dentistry in a U.S. university, passed away
suddenly in 2001, his final school year, leaving nearly $100,000 of unused
tuition and education tax credits.
When the father filed his own 2003 tax return, he claimed $30,000 in credits
transferred from his late son. The claim was denied by the Canada Revenue
Agency, which asserted the Income Tax Act only allows a transfer of current-year
tuition fees and education amounts.
The judge confirmed the CRA's interpretation of the Act. Tax Court Chief
Justice Donald Bowman, who rendered the decision, was sympathetic: "Strange as
it may seem an individual cannot transfer to his or her parent or grandparent
unused credits carried forward from a previous year ... The result is
anomalous."
This case clearly points to the need for legislative reform to the tuition
transfer rule. The highly technical provisions of the rule were particularly
harsh because the father paid nearly all his son's tuition. As the judge
lamented, "It is a sad case and one in which I would have liked to do something
to help [the taxpayer] but I do not think I can, however deserving he may be as
a matter of fairness."