Free cash for students: Tax tips for parents and students

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Should you’re a scholar in post-secondary college — or a mum or dad of 1 — it pays to know a couple of issues to assist maximize the advantages and scale back the taxes payable come subsequent April … and past.

First, file a tax return. Most post-secondary college students can have annual earnings beneath the federal fundamental private quantity (BPA) of $15,000 and received’t owe any taxes, however it’s strongly advisable to file a return for a number of causes, the first one being free money.

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There are a number of advantages which can be solely out there to taxpayers who file returns. First, there’s the GST/HST credit, which is accessible to lower-income people who’re 19 years of age or older. The credit score is paid quarterly, with the subsequent credit score scheduled for Oct. 5. The quantity you get is predicated on your loved ones earnings and could possibly be as excessive as $496 for a single individual.

College students in Alberta, Ontario, Manitoba, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador who’re at the very least 19 years of age can declare the climate action incentive payment. That is additionally a tax-free profit paid in quarterly instalments. The quantity you obtain is just not income-tested, and varies by province. For instance, eligible single Ontarians will obtain $488, whereas the Alberta program pays $772.

However past gathering authorities advantages, filing a tax return from an early age will assist set up registered retirement savings plan (RRSP) contribution room if a scholar has earnings from a full- or part-time job or a summer time job. RRSP room is usually equal to 18 per cent of the prior yr’s earned earnings. Based mostly on reported earned earnings, the Canada Revenue Agency will mechanically hold observe of your RRSP contribution room, which can be utilized till age 71. A tax deduction may be claimed for contributions made within the yr that don’t exceed your out there contribution room. Alternatively, the tax deduction may be claimed in a future yr.

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For instance, let’s say Sarah is a scholar who works half time and earns $10,000 of employment earnings in 2023. That is properly beneath the 2023 fundamental private quantity of $15,000, so she received’t owe any tax on this earnings. By submitting a 2023 tax return, she’s going to generate RRSP contribution room of $1,800 for 2024. Sarah may select to make an RRSP contribution in 2024, however defer claiming the tax deduction till she’s in the next tax bracket, maybe when she begins working full time after commencement.

Registered schooling financial savings plan withdrawals

If mother and father or different relations arrange a registered education savings plan (RESP) to assist fund a scholar’s post-secondary schooling, it’s vital to be strategic about your withdrawals to scale back or, in lots of instances, even remove any tax invoice related to receiving the funds.

An RESP is a tax-deferred financial savings plan that permits mother and father (or others) to contribute as much as $50,000 per baby to save lots of for post-secondary schooling. The addition of presidency cash within the type of matching Canada Training Financial savings Grants (CESGs) can add one other $7,200 per beneficiary.

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Contributions, which weren’t tax-deductible when made to an RESP, can typically be withdrawn tax free when the scholar attends post-secondary schooling. These are referred to as “refund of contributions,” or ROCs. Some other funds popping out of the plan for post-secondary schooling are known as “instructional help funds,” or EAPs. This contains the earnings, features and CESGs within the RESP.

At first look, it might sound engaging to solely withdraw ROCs, since they’re merely non-taxable, but when the purpose is to scale back the household’s taxes all through your entire course of the children’ research, it’s most likely higher to take some EAPs every year to completely use the scholar’s fundamental private quantity and different out there credit, such because the federal tuition credit score.

Take Isaac, a post-secondary scholar who earned no earnings in 2023. He may obtain roughly $22,000 in EAPs with no federal tax by claiming the 2023 federal BPA of $15,000, and, assuming undergrad Canadian tuition charges of about $7,000, the federal tuition credit score. (There could also be a little bit of provincial tax, relying on the scholar’s province of residence.)

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For 2023, a scholar could obtain as much as $26,860 in EAPs with out having to show to the RESP supplier that such a withdrawal request is reasonable. New for 2023, the federal government elevated the greenback quantity of EAPs that may be withdrawn within the first 13 weeks of schooling to $8,000, from $5,000, for full-time research.

Extra financial savings

It’s unlikely that many college students can have a lot left over after paying for their very own schooling, however any remaining funds may be contributed to quite a lot of registered plans, every of which gives its personal advantages. Historically, many college students have socked away extra summer time earnings in a tax-free financial savings account (TFSA), however a brand new possibility for 2023 is the first home savings account (FHSA).

The FHSA is a registered plan that offers first-time homebuyers the power to contribute $8,000 per yr, as much as a $40,000 lifetime restrict, to save lots of on a tax-free foundation in the direction of the acquisition of a qualifying house in Canada. The FHSA combines the very best characteristic of an RRSP, a tax-deductible contribution, with probably the most engaging characteristic of a TFSA, the tax-free withdrawal of all contributions, funding earnings or development earned within the account, when funds are used to purchase a primary house.

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For college kids, identical to with RRSP contributions, the FHSA deduction needn’t be taken within the yr it’s made, however may be indefinitely carried ahead and deducted in a later tax yr when the scholar could also be in the next tax bracket.

Take into account Jake, who’s in his last yr of post-secondary research. Whereas in class, he labored half time and summers, and, after paying for the price of his research and residing bills, he has $8,000 remaining. He may contribute that to an FHSA in 2023, and save that deduction for a later yr when he’s in the next tax bracket. This may give him a head begin towards saving for a down cost ought to he finally purchase a house throughout the subsequent 15 years.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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