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If you’re a student in post-secondary school — or a parent of one — it pays to know a few things to help maximize the benefits and reduce the taxes payable come next April … and beyond.
First, file a tax return. Most post-secondary students will have annual income below the federal basic personal amount (BPA) of $15,000 and won’t owe any taxes, but it’s strongly advisable to file a return for several reasons, the primary one being free cash.
There are a number of benefits that are only available to taxpayers who file returns. First, there’s the GST/HST credit, which is available to lower-income individuals who are 19 years of age or older. The credit is paid quarterly, with the next credit scheduled for Oct. 5. The amount you get is based on your family income and could be as high as $496 for a single person.
Students in Alberta, Ontario, Manitoba, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador who are at least 19 years of age can claim the climate action incentive payment. This is also a tax-free benefit paid in quarterly instalments. The amount you receive is not income-tested, and varies by province. For example, eligible single Ontarians will receive $488, while the Alberta program pays $772.
But beyond collecting government benefits, filing a tax return from an early age will help establish registered retirement savings plan (RRSP) contribution room if a student has income from a full- or part-time job or a summer job. RRSP room is typically equal to 18 per cent of the prior year’s earned income. Based on reported earned income, the Canada Revenue Agency will automatically keep track of your RRSP contribution room, which can be used until age 71. A tax deduction can be claimed for contributions made in the year that do not exceed your available contribution room. Alternatively, the tax deduction can be claimed in a future year.
For example, let’s say Sarah is a student who works part time and earns $10,000 of employment income in 2023. This is well below the 2023 basic personal amount of $15,000, so she won’t owe any tax on this income. By filing a 2023 tax return, she will generate RRSP contribution room of $1,800 for 2024. Sarah could choose to make an RRSP contribution in 2024, but defer claiming the tax deduction until she’s in a higher tax bracket, perhaps when she starts working full time after graduation.
Registered education savings plan withdrawals
If parents or other family members set up a registered education savings plan (RESP) to help fund a student’s post-secondary education, it’s important to be strategic about your withdrawals to reduce or, in many cases, even eliminate any tax bill associated with receiving the funds.
An RESP is a tax-deferred savings plan that allows parents (or others) to contribute up to $50,000 per child to save for post-secondary education. The addition of government money in the form of matching Canada Education Savings Grants (CESGs) can add another $7,200 per beneficiary.
Contributions, which were not tax-deductible when made to an RESP, can generally be withdrawn tax free when the student attends post-secondary education. These are called “refund of contributions,” or ROCs. Any other funds coming out of the plan for post-secondary education are referred to as “educational assistance payments,” or EAPs. This includes the income, gains and CESGs in the RESP.
At first glance, it might seem attractive to only withdraw ROCs, since they are simply non-taxable, but if the goal is to reduce the family’s taxes throughout the entire course of the kids’ studies, it’s probably better to take some EAPs each year to fully use the student’s basic personal amount and other available credits, such as the federal tuition credit.
Take Isaac, a post-secondary student who earned no income in 2023. He could receive approximately $22,000 in EAPs with no federal tax by claiming the 2023 federal BPA of $15,000, and, assuming undergrad Canadian tuition fees of about $7,000, the federal tuition credit. (There may be a bit of provincial tax, depending on the student’s province of residence.)
For 2023, a student may receive up to $26,860 in EAPs without having to demonstrate to the RESP provider that such a withdrawal request is reasonable. New for 2023, the government increased the dollar amount of EAPs that can be withdrawn in the first 13 weeks of education to $8,000, from $5,000, for full-time studies.
It’s unlikely that many students will have much left over after paying for their own education, but any remaining funds can be contributed to a variety of registered plans, each of which offers its own benefits. Traditionally, many students have socked away excess summer earnings in a tax-free savings account (TFSA), but a new option for 2023 is the first home savings account (FHSA).
The FHSA is a registered plan that gives first-time homebuyers the ability to contribute $8,000 per year, up to a $40,000 lifetime limit, to save on a tax-free basis towards the purchase of a qualifying home in Canada. The FHSA combines the best feature of an RRSP, a tax-deductible contribution, with the most attractive feature of a TFSA, the tax-free withdrawal of all contributions, investment income or growth earned in the account, when funds are used to buy a first home.
For students, just like with RRSP contributions, the FHSA deduction need not be taken in the year it’s made, but can be indefinitely carried forward and deducted in a later tax year when the student may be in a higher tax bracket.
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Consider Jake, who is in his final year of post-secondary studies. While in school, he worked part time and summers, and, after paying for the cost of his studies and living expenses, he has $8,000 remaining. He could contribute that to an FHSA in 2023, and save that deduction for a later year when he’s in a higher tax bracket. This would give him a head start toward saving for a down payment should he ultimately buy a home within the next 15 years.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.
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