Tax credit – Page 2 – 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 aspects of charitable giving

An important part of sharing in our society is the support we provide to charitable causes and organizations. In fact, our tax system has a variety of rules that ease the cost of donating.

While keeping the needs of the charity at the forefront, a tax-informed donor may wish to act strategically to gain greater benefit personally and for the charity. In that way, a donation can achieve its philanthropic purpose at the least tax cost to the donor – a value proposition that benefits both parties to the transaction.

Two-tier credit structure

Despite that many people casually refer to donations as being tax-deductible, they instead entitle a donor to claim a tax credit. Deductions are generally more valuable as they can reduce high-tax-bracket income, whereas tax credits are usually limited to the lowest-bracket rates. However, the charitable donation tax credit is structured to quickly become a tax-lucrative proposition.

The initial tax credit rate is indeed set at the lowest federal bracket rate of 15%, but once donations exceed $200, then the highest bracket rate of 29% applies. Provincial and territorial credits are applied against respective provincial/territorial taxes in a similar two-tier manner, using this same $200 threshold. For first-time donors, the 2013 Federal Budget introduced an enhanced “super” tax credit. It adds 25% to the federal credit rates (i.e., 40% and 54% at each tier) for cash donations up to $1,000. To qualify, a taxpayer (including the spouse) cannot have claimed charitable gifts since 2007. The enhanced tax credit is available until 2017.

For a given tax year, a person can claim a donation amount up to 75% of net income. Any unused donations can be carried forward to be claimed up to five years into the future.

Rather than simply making a cash donation, a donor might consider giving appreciated marketable securities, such as stocks, bonds or mutual funds. If these securities are donated in-kind to the charity, a special rule allows any as-yet unrealized capital gains to be effectively negated by the donation. Had the donor instead cashed out the investment before donating, taxes on disposition would have reduced the cash available for the subsequent donation.

Administratively, the Canada Revenue Agency allows spouses to pool donations to determine the amount of credit available, and either spouse is entitled to make the claim. Since it is a credit against tax due, there is no serious tax revenue loss for the government by making such concessions, except that it allows couples to collectively break through the $200 threshold sooner than if they were required to do so individually.

Donations at death

A special rule applies in the year of death, whereby donations can be claimed against as much as 100% of net income. If donations exceed this amount then the excess can be carried back to the year prior to death, again with the potential to offset 100% of that year’s net income.

Donations made by beneficiary designation on registered plans and life insurance are deemed to occur in the year of death, despite that it is the person’s death that leads to the payment.

Similarly, donations by a person’s Will are deemed to occur in the year of death, but the actual donation must occur in the first year of the estate in order to take advantage of this rule.

Charitable remainder trust

Though, as mentioned above, a greater amount of credit is available in the year of death, it remains a benefit after the person’s death. For someone planning to make a very large donation at death but looking to take advantage of the tax credits personally while living, a charitable remainder trust may fit the situation.

This is a formal arrangement that requires the assistance of legal, tax and actuarial advice. The value of the donation is the present value of the capital at the person’s expected date of death, which is when final outright ownership passes to the charity. In the meanwhile, the donor retains a life interest, for example, to continue to live in a house, or possibly even receive income from the property until death.

As this is an inter vivos trust (i.e., settled during the donor’s life), the donor can claim the donation in the year of settlement, with the five-year carry forward available. This might be ideal for someone donating everything to charity at death, as the tax credits would otherwise go unused.

Exercise and the medical expense tax credit

At issue

The scope of expenses that may be claimed under the medical expense tax credit (METC) is limited to the criteria outlined in subsection 118.2(2) of the Income Tax Act.

For a medical “service” to qualify, the payment must be made directly to a licensed medical professional, or to the corporation employing that professional. For any “device or equipment” to qualify, it must be prescribed (in the medical sense) by a medical practitioner to qualify, and also be prescribed in the legislative sense. This prescribed list of about two dozen types of equipment and devices appears in Income Tax Regulation 5700.

Though on the face of it, these rules are fairly black-and-white, they are often the subject of inquiries to the Canada Revenue Agency (CRA) and appeals to the court system.

Roberts v. The Queen, 2012 TCC 319

The taxpayer had prostate cancer, and suffered from incontinence following a radical prostatectomy. His doctor recommended that he join the local YMCA and engage in an exercise routine. Correspondence from the doctor confirmed that the symptoms of incontinence decreased dramatically after joining the club.

The disallowed METC claim was “regrettably” upheld on appeal, as there is no provision for health club membership within s.118.2(2). The taxpayer’s alternative argument was that the CRA allows for recreational programs to qualify as medical expenses, but the judge clarified that this would only apply for individuals entitled to claim the disability tax credit.

Anthony v. The Queen, 2012 TCC 334

The taxpayer suffered from severe chronic panic, for which her doctors recommended she purchase and use a hot tub. This alleviated the pain and significantly assisted her ability to walk. Even so and even though CRA did not dispute the effectiveness of the hot tub, the METC claim was denied on reassessment.

On appeal, the judge considered ITA paragraphs by which the hot tub might constitute a home renovation that is “of a type that would not normally be incurred by persons who have normal physical development” and/or whether it is a “device that is exclusively designed to assist an individual in walking where the individual has a mobility impairment.” [The emphasis appeared in the judgment.]

Though the judge was explicitly sympathetic, on both grounds she found that a hot tub is something “commonly purchased by persons who do not suffer severe disabilities and is not exclusively designed to assist persons with a mobility impairment.” Accordingly it did not fulfill the legislative intent, and the appeal was dismissed.

CRA 2011-0402881E5 – Weight Loss Program as a medical expense

The CRA was asked about METC qualification for a few types of expenditures, including fees paid for a weight-loss program.

The author took the view that such a program undertaken by an individual for the treatment of obesity may qualify if provided by a licensed medical practitioner for therapeutic or rehabilitative purposes. On the facts presented however, the opinion was given that the intended claim would be unlikely to succeed.

Practice points

Patients should take their medical advice from qualified medical practitioners, but as taxpayers they should not assume that a treatment or device automatically qualifies for the METC just because it was medically prescribed.
Where alternative treatments, devices and/or device features are presented, it would be prudent to review the METC criteria before making a final decision.
Guidance on the CRA’s approach is available on its website. Search for Interpretation Bulletin IT-519R2 (Consolidated), Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction.