Carrying forward a puzzle
As you work through the preparation of your 2011 tax return, some rules are so obscure that you may be utterly confounded by their application.
Take, for example, the highly complex rules surrounding the tuition, textbook and education tax credits and their carryforward to subsequent years, which was the subject of a technical interpretation released by the Canada Revenue Agency this week.
To understand the issue, let's assume that Hart, who completed his MBA in 2011 and began working full-time last fall, had some foreign income in 2011, perhaps from his investment in a global mutual fund. Foreign taxes were withheld on the foreign dividend income he received, giving rise to a foreign tax credit. Let's also assume that Hart had tuition, textbook and education tax credits for 2011.
Hart decides to use his foreign tax credit to reduce his tax payable to zero, reasoning that since foreign tax credits cannot be carried forward, whereas the unused tuition amounts can generally be carried forward, he wouldn't waste his one-time opportunity to use the foreign tax credit in 2011.
When Hart received his notice of assessment, however, he learned that his tuition credit carryforward was effectively reduced by the amount of the foreign tax credit he claimed. He was puzzled and wrote to the CRA.
The CRA states the following: "You can carry forward and claim in a future year the part of your tuition, education, and textbook amounts you cannot use (and do not transfer) for the year ... You have to claim your carry-forward amount in the first year that you have to pay income tax."
The CRA quixotically explains that the phrase "'in the first year that you have to pay income tax' ... makes it clear that where income tax is payable, the credit must be applied."
The CRA is essentially paraphrasing the rule for carryforward of the tuition credits in the Income Tax Act, which is quite technical. It essentially requires you to use the tuition credits, along with various other personal credits, to reduce your tax to zero before being allowed to carry forward an amount to a future year.
In other words, even though Hart used his foreign tax credit (not a personal credit) to reduce his 2011 tax payable to zero, the amount of the tuition tax credit available for carryforward is reduced by the amount of tuition credit that could have been claimed had the foreign tax credit not been claimed instead.
So there was really no benefit to Hart applying the foreign tax credit, which was only good for 2011, prior to claiming his tuition credits as the amount available for carryforward remains the same.
This rule came into effect in 2002. The CRA says the carryforward rule "is designed to address the situation in which a student does not have sufficient tax owing against which to apply the credits."