Students are preparing to head back to school so it’s a good time to walk through the basics of the federal tuition tax credit for postsecondary education and look at an unusual recent tax case involving the tuition carryforward rules.
The tuition tax credit for post-secondary education is a federal non-refundable credit for the cost of tuition fees (tax credits for education and textbook amounts were discontinued as of 2017). Since the credit is non-refundable, some students may find they don’t need to claim all of it to reduce their income tax to zero since their taxes owing on minimal income from part-time or summer employment may be fully offset by the enhanced basic federal tax credit ($14,398 for 2022).
Students who don’t use their full tuition credit have a couple of options. They can either transfer the unused amounts to a spouse or partner or (grand)parent, or carry forward unclaimed amounts (including any education and textbook amounts prior to 2017) indefinitely. The individual claiming the transferred credit, such as a parent (which includes a natural parent, step-parent, adoptive parent or even a spouse’s or partner’s parent), need not be the one who paid the tuition.
The maximum amount that can be transferred is $5,000 less the amount of tuition for the current year that is claimed on the student’s return. In addition, amounts carried forward from previous years must be used by the student before the current year’s amounts, and any carried-forward amounts that are not completely used by the student in the current year can only be claimed by the student in a subsequent year and cannot be transferred.
The case
A Federal Court of Appeal decision in June dealt with the tuition carryforward rules, albeit in a very unique set of circumstances. A former student was appealing a 2020 decision of the Tax Court that denied him the tuition carryforward credit.
The person is now a tax lawyer who lives in Calgary, having immigrated to Canada from the United States in 2012. From 2002 to 2011, he attended university on a full-time basis in the U.S., starting at the University of Pittsburgh, followed by law school at Duquesne University, and then earning his master’s degree in tax at the University of Florida.
He paid tuition totalling a little more than US$159,000 during this period, which, using historical Canada-U.S. exchange rates, amounted to $179,000 of tuition in Canadian dollars. The universities provided him with signed copies of Canada Revenue Agency Form TL11A Tuition and Enrolment Certificate – University Outside Canada, which is used to certify eligibility for claiming tuition fees of a student attending a university outside Canada.
After immigrating to Canada, he filed Canadian income tax returns for the 2002 to 2011 tax years. All these tax returns were filed after he became a resident of Canada even though he was neither a resident of Canada nor a deemed resident of Canada from 2002 through 2011. These returns were assessed (and reassessed) by the CRA on the basis that he had no tax payable in Canada.
When filing his 2012 Canadian tax return, which was the first year he was considered a tax resident of Canada, he claimed his unused tuition tax credits carried forward based on the tuition paid to the U.S. universities from 2002 to 2011 when he was not a Canadian resident and had no source of income in Canada.
The CRA reassessed him for his 2012 taxation year to disallow the claimed tuition tax credits and to reduce his tuition tax credit carryforward amount to zero. He appealed this reassessment to the Tax Court of Canada, which heard the case in 2020.
The issue before the court was whether he should be entitled to a tuition tax credit in each of the tax years from 2002 through 2011 because of tuition paid to universities in the U.S. in those years. These credits, he believed, resulted in him having an unused tuition tax credit balance at the end of 2011 that he could then deduct in computing his tax payable in 2012 and subsequent tax years once he became a resident in Canada.
The question came down to whether the tax rules governing tuition and tuition carryforward credits apply to all non-residents (as he argued) or only to those non-residents who are considered taxpayers in the years for which tuition is paid and for whom that year is a taxation year (the CRA’s position).
The CRA argued that when a non-resident individual is not required to file an income tax return for a particular year, because that individual was not employed in Canada, did not carry on business in Canada and did not dispose of taxable Canadian property, that individual is simply not considered a taxpayer for purposes of the Income Tax Act, and, therefore, that year is not a taxation year of that individual.
Consequently, the individual is neither required, nor even able, to compute their tax payable the same way a Canadian resident taxpayer would. As a result, even when a non-resident pays tuition to an eligible education institution for that year, that individual has no tuition tax credit for that year and no unused tuition tax credits at the end of that year to carry forward.
After a detailed and lengthy legal analysis, the Tax Court judge agreed, concluding that because the tuition credit rules require an individual to be a student during a taxation year to claim a tuition credit, a student is not entitled to a tuition tax credit in any year that is not a taxation year.
Put another way, because the person in question here was not considered to be a taxpayer in any of the years from 2002 to 2011, none of those years was a taxation year for him. Accordingly, he had no tuition tax credits in any of those years, and had nothing to carry forward to deduct against his tax payable in 2012.
In June 2022, a three-judge panel of the Federal Court of Appeal, in a short, three-page decision delivered from the bench, dismissed the former student’s appeal, finding the Tax Court’s 2020 decision to be correct.