Student – Doug Carroll

Denied tax credit for interest on student loans

At issue

As many a parent will attest, it can be very costly to put a child through post-secondary schooling. If the family does not have immediate resources available, it is common to consider borrowing to finance the need.

Fortunately, the tax system provides support to qualified loans through a non-refundable tax credit based on the amount of interest paid in the course of retiring such loans. To qualify, section 118.62 of the Income Tax Act (ITA) requires that the loan must be made “under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level.”

Unfortunately, it’s almost an annual ritual that a case is reported where a past student is denied entitlement to the tax credit because the particular loan does not meet this criterion.

Mueller v. R., 2013 TCC 3

Two sisters were unable to obtain student loans under the federal government’s student loan programs, as their parents’ income was too high. Instead, they secured loans from a bank under its “Student Line of Credit” program, promoted by the bank as being at rates lower than under the student loan program.

On filing their tax returns in the year following graduation, their interest claims related to loan retirement were denied.

The sisters’ mother represented them in their appeals, and testified that a bank employee had represented that the loans were tax deductible. No reference to this effect appears in the promotional literature, and no one from the bank was called to testify.

It was acknowledged that the loans were not of the listed types in ITA 118.62, which the judge found was “fatal to their claim.” Appeals denied.

Sandhu v. R., 2010 TCC 223

The taxpayer was represented by his father in this appeal from a denied tax credit claim based on repayment of a loan to a bank.

The father provided a letter from a bank representative dated a week prior to the hearing. It read in part: “Due to my busy schedule, I will not be able to appear personally on April 7, 2010. The student loan to Gurdarshan Sandhu was made under the Canada Student Loan program.”

The judge allowed no evidential weight to the letter as no details of the loan were provided. Indeed, there was no way to be certain whether the referenced loan was even the loan at issue in court. The judge went so far as to speculate whether the writer may have been confusing student loans with some internal lending program the bank makes available for professional graduate programs. Appeal denied

2001-0074215E Refinancing-Student Loans

A taxpayer proposed to obtain a mortgage against his residence to reduce the interest rate on his existing qualified student loan. The Canada Revenue Agency (CRA) stated that interest on the new loan would not qualify for claiming the tax credit under ITA 118.62.

2010-0376461I7E Credit for Interest on Student Loan

The CRA was asked its opinion on whether interest paid on a student loan assigned to a collections agency would still qualify for the tax credit claim. The writer opined that the likelihood is that being under a collections process alone would not be sufficient to lose the tax credit claim, but that a court judgment would definitely extinguish it.

Practice points

A ‘loan to a student’ is not necessarily a “student loan” for the purpose of claiming the tax credit on the interest. To qualify, the loan must be arranged under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a corresponding law of a province.
If challenging a denial of interest, make sure the facts are satisfied (so you don’t waste your time), and that you have the original documentary evidence to prove it. Second and third degree-removed hearsay assertions will not suffice.
A debtor should carefully consider the lost tax credit on qualifying student loans before including those debts in a refinancing or consolidation, even if on the face of it the new interest rate appears lower.
A person facing collections action should understand the importance of keeping up payments on student loans in order to preserve the tax credit entitlement, as this will be lost if a judgment is entered.

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.

Drawing down a RESP – How, how much and when it’s available

It’s December as this is being written, not traditionally when we talk about back-to-school matters.

For parents whose child launched a full-time post-secondary career this past September however, there is an important threshold reached around this time. The upper limit on some Registered Education Savings Plan payments are eased once the beneficiary/student has completed 13 consecutive weeks in a qualifying educational program – which would be roundabout the beginning of December.

Before getting into the details of this threshold, let’s provide some context by looking at how funds are drawn from a RESP.

Accessing RESP money

The extraction of funds from a RESP is covered by a network of qualifying rules, which in turn can affect the continued use of the plan. A payment out of a RESP will generally fall under one of these categories:

Educational Assistance Payment (EAP)

An EAP is defined in the Income Tax Act as an amount, other than a refund of payments (most often a “refund of contributions” described below), paid out of a RESP to or for beneficiaries to assist them to further their education at the post-secondary level. Each payment comprises accumulated income and government grant/assistance money, and is taxable as regular income to the student in the year received.

The Canada Revenue Agency considers an EAP to be a broad term, but does not provide specific guidance on what that may encompass. Instead, CRA’s general approach is that if payments are made in accordance with a particular registered plan, the respective RESP trustee will comply with the ITA requirements.

A full-time student may become entitled to an EAP once enrolled in and attending a qualifying educational program.

Refund of contributions

Plan subscribers (parents most often) are entitled to the return of their own after-tax contributions, which accordingly are not taxed upon receipt. Depending on the plan terms, this could be payable to plan subscribers personally or to the student. If the student is not qualified for an EAP at the time, part of the refund will have to be paid back to the government proportionate to the amount of grant/assistance the plan received.

Accumulated Income Payment (AIP)

In limited circumstances where it is clear that it will not be possible for the RESP to pay any EAPs, the income earned within the plan may be paid out as an AIP. This type of payment is made to the plan subscriber and is subject to regular income tax plus an additional tax of 20%.

Payment to a designated educational institution

In situations where neither an EAP nor an AIP can be made, the plan income must be paid to a Canadian educational institution which would otherwise qualify for EAP purposes. This is basically a forfeiture of the income as the subscriber does not receive a tax slip or a donation receipt.

EAP annual limits and the 13-week threshold

There are limits on the early access to most RESPs. For full-time students, the EAP limit is $5,000 during the first 13 consecutive weeks in a qualifying educational program. If tuition and related payments are higher, on a case-by-case basis the government may approve a higher EAP amount.

After that 13-week threshold has been crossed, there is technically no limit on the amount of EAPs that can be paid, so long as the student continues to be qualified. Of course that doesn’t mean that the floodgates are open; any EAP request will still have to satisfy the requirement of being for a bona fides cost of financing post-secondary education.

Administratively, CRA relies upon RESP trustees to process the bulk of submitted expenses. Since 2008, its administrative approach is to allow the payment of up $20,000 (to be indexed annually by the Consumer Price Index) without the RESP trustee having to assess the reasonableness of specific items, nor to require the production of receipts or a list of expenses. Above that figure, a list of expenses would be necessary as part of the RESP trustee’s diligence or review to assess the reasonableness of the amount. Also bear in mind that CRA may later inquire into those expenses, so receipts should be retained as proof should the need arise.

Finally, be aware that $5,000/13-week rule will apply once more if the student has been away from school for a period of 52 weeks or more.