Funding Post-Secondary Education Costs

In a few short weeks, summer will draw to a close and thousands of college and university students will return to school.

Taxpayers continue to subsidize a big chunk of post-secondary education costs. But of course students and parents also have a big financial stake. The costs of tuition, room and board, textbooks, supplies and other expenses keep rising, with no end in sight. There are several government incentives and tax planning ideas to offset some of the costs of post-secondary education for both parents and students:

Tips for parents

• Consider setting up a Registered Education Savings Plan (RESP). Contributions are not tax-deductible, but the government pays a grant directly to the RESP equal to 20% of annual contributions (up to an annual maximum of $500 and a lifetime limit of $7,200 per student) for the benefit of children under 18. The last federal Budget removed the annual limit on contributions, and increased the lifetime contribution limit to $50,000, making 2007 a good year to start a plan. Income earned in the plan is tax-deferred until withdrawn. The grants and accumulated income in the plan can be withdrawn to support the costs of a child attending post-secondary school and are reported as income by the child at that time. Original contributions can be returned to the parents tax-free. There is an obvious advantage to setting up a plan when your child is young to take advantage of the annual grants and compounding of investment income.
• You can receive a tax credit based on your child's tuition and education amounts to the extent he or she does not need the credit to reduce his or her tax to zero.
• If you are self-employed, you can pay your children reasonable wages for work they do in your business. The cost is fully deductible to the business and your children likely will pay little or no tax on the income (see our article "Employing Minor Children" in this issue of Tax Alert).
• Incorporated business owners can arrange to have their post-secondary student children own shares in the company, either directly or through a family trust. With proper structuring, dividends can be paid out to the student with little or no tax paid by the student.
• If your student is still living at home and you have other younger children, you can pay the older child (over 17) to care for the younger ones (under 17) to enable you to work. The payments can be claimed as child care expenses by the lower income spouse and retained by the student to finance education costs.

Tips for students

• Tuition fees qualify for a tax credit. There is also an education credit based on a formula that takes into account the number of months you are in full- or part-time attendance. As noted above, if your income is low enough, some of the tuition and education credit can be transferred to a parent or grandparent, subject to an upper limit. Any unused credits carry forward and can be used in a future year when income is high enough to absorb them.
• A tax credit was added in 2006 to help with textbook costs, saving the average student about $80 per year. Further, all scholarship, fellowship and bursary income received by post-secondary students is now exempt from income tax.
• Students should file tax returns when they are at school to access certain tax credits. A student will generally qualify for a GST credit of $58 each quarter. Some provinces provide additional credits – for example, Ontario's tax credit of up to $400 based on rent paid (other than to a campus residence).
• Students often work summers or part-time during school to help pay for their education. Full-time students in Ontario, for example, paying tuition of $4,000 per year, are entitled to enough tax credits to make their first $17,000 of income completely exempt from tax.
• Older students who have been in the workforce for a few years before returning to school full-time and have accumulated funds in an RRSP can tap into those savings tax-free through a "lifelong learning plan." They may take up to $10,000 per year from the RRSP, over a four-year period, to a maximum of $20,000. Once studies have been completed, the withdrawals are repayable to the RRSP over a maximum of ten years, without interest.
• Most students qualify for government loans that are repaid after graduation. Scholarships and bursaries are also offered through numerous organizations if you meet certain criteria. It is worth exploring these if you think you might be eligible.

Doug Greenhow is a tax partner in Collins Barrow's London member firm.