Tag: Schooling

Education finance goes back to school

The continuing case for RESPs

It’s back-to-school time, bringing with it both excitement and anxiety as children and their parents return to their routines.

But when it comes to saving for higher education, this year is arguably anything but routine. Familiar education supports have been eliminated as part of the introduction of the Canada Child Benefit (CCB), and the latest release of tuition data shows the steady continuing rise in the cost of post-secondary education.

It’s a reminder that parents need a long-term plan for how they will pay for their children’s education. In turn, it should reinforce the value proposition offered by registered education savings plans (RESPs) and matching Canada education savings grants (CESGs).

CCB and education supports

From last year’s election campaign through to this year’s federal budget, most of the media coverage of the CCB has focused on what it’s replacing: the Canada Child Tax Benefit, National Child Benefit supplement and Universal Child Care Benefit. (For a more detailed rundown on the CCB generally, see our blog post “What does the Canada Child Benefit mean for parents?”)

As well, the family tax cut has been eliminated, and the children’s fitness and arts credits are halved for 2016 and eliminated thereafter.

On the education front specifically, the tuition tax credit remains, but the education tax credit and textbook tax credit are eliminated after 2016. For full-time students, those credits are respectively worth $400 and $65 for each month a student is in school. For example, the value for a student in school eight months in a year would be: [$465 x 8] = $3,720 x 15% credit rate = $558.

If a student does not use the entire education, textbook and tuition credits to reduce his/her tax owing, any remaining amount may be transferred to a parent, grandparent or spouse. After 2016, this will only apply to the tuition credit, but the cap on the transferrable amount will continue to be $5,000.

As part of the CCB package, Canada Student Grants are to increase by 50%, from $2,000 to $3,000 per year for students from low-income families and from $800 to $1,200 per year for students from middle-income families. Those income thresholds depend on number of children and province. Currently for a one-child family, low income is about $20,000 to $25,000, and middle income ranges from $38,000 to $48,000.

Tuition costs on a steady rise

Each September, Statistics Canada releases the results of its annual survey of tuition and living accommodation for colleges and universities. The average tuition for a full-time undergraduate student in 2016/17 is $6,373, 2.8% higher than the 2015/2016 average of $6,201. This is a weighted average by students in each program. Strip out the higher costs of dentistry, medicine, law and pharmacy and the range is between $4,580 and $7,825.

Beyond the absolute numbers and the current-year change, the most instructive part of the survey is the long-term trend. Looking back across the 11 years available in the data series, the average cost of tuition has risen almost 4% annually on average, for a cumulative rise of 45%.

Table: Rising cost of post-secondary education

Figures are also tracked for compulsory school fees (admission fees, student association fees, athletic levies, etc.), which have similarly risen by about 4% annually, from $608 in 2004 to $873 in 2016.

If these trends continue, a child born in 2006 who begins post-secondary education at age 18 in 2024 will face first-year tuition and additional compulsory fees in excess of $9,700, almost double what it would have been at birth. And this does not include accommodation, transportation or groceries – let alone discretionary expenses.

Saving for education using RESPs

In law, the Latin phrase res ipsa loquitur means “the facts speak for themselves.” In making the case for the need to save prudently for a child’s future education, it is reasonable to say that these numbers speak volumes.

It is clear that funding a child’s education has become more costly and more complicated. Those who lost out in the CCB changes will foot more of the ever-inflating bill personally, and those who gained must understand that the greater amount they are getting in those early years is intended in part to help them save for later.

The three key features of RESPs should figure prominently in all plans:

  • Investment returns grow tax-sheltered
  • Matching 20% CESGs accelerate those investment returns
  • Income and grants can be taxed to an attending student on withdrawal

More information is available in our “Registered Education Savings Plan” InfoPage and our quick-reference InfoCard.

Borrowing retirement savings to upgrade skills – An overview of the RRSP LLP

One of the most important lessons a person can learn on entering the workforce is that it’s as important to save as it is to earn in the first place.  In effect, you are paying your future self now, commonly through the use of a registered retirement savings plan (RRSP).

But the route from worker to retiree is not always a straight line.  Whether due to an involuntary work displacement or a conscious decision to pursue a new direction, many people return to school to upgrade their skills and improve their future prospects.

While public programs may be available for some of those retraining costs, it is usually up to the individual to shoulder the bulk of the burden.  Fortunately, our tax system allows RRSP savers to help themselves in such circumstances, through the Lifelong Learning Plan (LLP).

LLP suspends tax on withdrawals

Put simply, under the LLP a withdrawal from an RRSP is not taxable in the year of withdrawal.  No interest is charged at any time, and so long as the total amount is paid back to an RRSP within the prescribed time requirements, no tax will apply (other than under the normal RRSP rules applicable on later withdrawals).

Qualified participants

The LLP can be used to help finance a person’s own education or that of a spouse or common law partner.  It is not available for a child’s education.

The RRSP owner must be resident in Canada, though the educational institution may be elsewhere so long as it qualifies for the education amount tax credit.  The student must be enrolled in a post-secondary program, attended on a full-time basis (or part-time if the student meets disability conditions).  Full time generally means at least 10 hours per week over at least three months.

The LLP can be used if the student is already enrolled, but not if the program is complete.  If the student is not yet enrolled, a written commitment from the institution must be received no later than March of the year after the RRSP withdrawal.  Participation may continue to no later than the end of the year in which the student reaches the age of 71.

Financial limits

The maximum annual withdrawal limit for the LLP is $10,000, with a total limit of $20,000.  These apply on a per-person basis, so that spouses have effectively double the amounts available if desired, and can use the funds on either or both.

For each withdrawal, the RRSP owner confirms qualification and withdrawal amount by completing Part 1 of Canada Revenue Agency (CRA) Form RC96 titled Lifelong Learning Plan (LLP) – Request to Withdraw Funds from an RRSP.  This is then filed with the RRSP issuer, who completes Part 2 verifying qualification (to the extent of its knowledge), provides a copy of the completed form back to the RRSP owner and keeps the original for its files.

No tax is withheld or due, but the RRSP issuer will provide a T4RSP slip to the RRSP owner showing the amount in Box 25 “LLP withdrawal.”  Once the LLP is opened, an LLP Statement of Account will be appended to the RRSP owner showing the amount.

Continuing deferral and eventual repayment

So long as the qualifying conditions remain satisfied and the 10-year repayment period (described in the following paragraph) has not begun, RRSP withdrawals may continue until January of the fourth calendar year after the year of the first withdrawal.

Repayments must be made over the course of no more than 10 years.  A minimum of one-tenth of the total withdrawal is due each year, though more may be repaid if the RRSP owner wishes.  This time period will be shortened if the RRSP holder dies, turns 71 or becomes a non-resident.

Repayment must begin no later than the fifth year after the first LLP withdrawal, but may be required sooner.  That means that if a first withdrawal is made in 2014, the first repayment must begin no later than 2019, though the payment may be made as late as the first 60 days of 2020.

As to repayments beginning sooner, the CRA monitors the tax returns of LLP students, specifically line 323 of Schedule 11.  If the student is not entitled to claim the education amount in two consecutive years, the 10-year repayment period begins in that second year.

Note also that once an LLP balance is repaid in full, the LLP may be used again.  In fact, there is no limit to how many times it may be used over a lifetime, and may even be used while there remains a balance in an RRSP Home Buyers’ Plan (HBP), though that could present a strain on finances.

Failure to repay

Be aware that if the RRSP owner pays less than the calculated annual repayment, the underpaid amount will be included as taxable income that year.  As no money will have been received by the RRSP owner at that time (it having been spent in a prior year on education), the cash to pay the associated tax will have to come from other sources.  This can be a significant financial drain for a very long period of time.

As with the HBP, LLP participants should carefully plan from the earliest stages to assure that the commitment is understood and manageable, and will not inadvertently result in a permanent depletion of RRSP savings.

Tax and the post-secondary education student

September is back-to-school month. In addition to the excitement and anxiety, those in post-secondary schooling often face fairly substantial expenses.

Fortunately, our tax system allows many avenues of tax relief for post-secondary education students. Here are the most common tax issues for students.

Hitting the books

Education amount

For the federal education amount, a student may claim either the $400 full-time amount or the $120 part-time amount, depending on the parameters of the program in which he or she is enrolled. Either way, the amount is multiplied by 15%, the lowest income-tax bracket rate, for a value of $60 or $18 for each month of full- or part-time enrollment, respectively.

Textbook amount

A student qualified for the education amount may also claim the textbook amount. The monthly amount for full-time students is $65 and for part-time students is $20, being worth about $10 and $3 per month, respectively, once multiplied by the 15% rate.

Tuition credit

Eligible amounts include fees for admission, library access, laboratory usage, athletic facilities, examinations and diplomas. Student association fees do not qualify, nor do any amounts reimbursed, for example, by an employer. The actual amount is again multiplied by the lowest income-tax bracket rate to determine the value of the credit. The amount must total at least $100 per institution in order to claim the credit.

Transfers and carryforwards

If a student does not have enough income to make use of the education, textbook and tuition credits, it may be possible to transfer up to a $5,000 amount (that is, $750 of value) to a spouse, common-law partner, parent or grandparent for that year. Alternatively, such amounts may be carried forward to be used against the student’s future years’ income, but transfers to other individuals in those future years are not allowed.

Work and study

Educational Assistance Payments (EAP)

Amounts paid to a student from a registered education savings plan (RESP) as an EAP will be taxable to the student. These taxable amounts are the earnings and payout of government grant money previously received into the RESP. Amounts drawn from an RESP that are return of contributions are not taxable, whether paid to the student, to an educational institution directly or back to the plan subscriber.

Tax-exempt awards

Scholarship, fellowship and bursary income is tax-free so long as the associated enrolled program is one that entitles the student to claim the education amount.

Getting there and back

Moving expenses

A person who moves at least 40 kilometres to attend a post-secondary institution may be entitled to claim moving expenses, but only as a deduction against the taxable portion of scholarships, research grants and the like.

Transit passes

Though certainly not exclusive to students, public transit passes are obviously used frequently by post-secondary education students. The tax credit for such passes is welcome relief.

GST/HST credit

 The commencement of post-secondary education often coincides with the student having turned 19, which is the threshold age to qualify for the GST/HST credit. To obtain the credit, which is in the form of a quarterly payment or direct deposit, the individual must file a tax return and check the appropriate box.

Out into the world

Moving expenses, revisited

Travel to a summer job may qualify for the moving expense deduction, as long as the 40-kilometre requirement is satisfied. The deduction is net of any reimbursement or allowance paid by the employer.

Interest on student loans

On the repayment of student loans, an amount may be claimed for the interest paid. This applies to loans under the Canada Student Loans Act, the Canada Student Financial Assistance Act and similar provincial/territorial laws. If desired, this claim can be carried forward up to five years from the date the interest is paid.

Lifelong learning plan (LLP) repayments

Generally, LLP repayments to a registered retirement savings plan must commence no later than five years after the first withdrawal and be completed in 10 years. However, LLP repayments often commence earlier. Failure to make a required payment results in the amount being included in income.