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Free money for college kids: Tax suggestions for folks and college students

Jamie Golombek: Each post-secondary scholar ought to file a tax return, even when they do not owe any cash

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For those who’re a scholar in post-secondary faculty — or a dad or mum of 1 — it pays to know a couple of issues to assist maximize the advantages and cut back the taxes payable come subsequent April … and past.

First, file a tax return. Most post-secondary college students can have annual revenue beneath the federal fundamental private quantity (BPA) of $15,000 and gained’t owe any taxes, but it surely’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 are solely accessible to taxpayers who file returns. First, there’s the GST/HST credit score, which is obtainable 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 revenue and may very well 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 a minimum of 19 years of age can declare the local weather motion incentive cost. That is additionally a tax-free profit paid in quarterly instalments. The quantity you obtain shouldn’t be income-tested, and varies by province. For instance, eligible single Ontarians will obtain $488, whereas the Alberta program pays $772.

However past amassing authorities advantages, submitting a tax return from an early age will assist set up registered retirement financial savings plan (RRSP) contribution room if a scholar has revenue from a full- or part-time job or a summer time job. RRSP room is often equal to 18 per cent of the prior 12 months’s earned revenue. Based mostly on reported earned revenue, the Canada Income Company will mechanically hold observe of your RRSP contribution room, which can be utilized till age 71. A tax deduction might be claimed for contributions made within the 12 months that don’t exceed your accessible contribution room. Alternatively, the tax deduction might be claimed in a future 12 months.

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

Registered training financial savings plan withdrawals

If dad and mom or different members of the family arrange a registered training financial savings plan (RESP) to assist fund a scholar’s post-secondary training, it’s vital to be strategic about your withdrawals to cut back or, in lots of circumstances, even get rid of any tax invoice related to receiving the funds.

An RESP is a tax-deferred financial savings plan that enables dad and mom (or others) to contribute as much as $50,000 per little one to avoid wasting for post-secondary training. The addition of presidency cash within the type of matching Canada Schooling 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 usually be withdrawn tax free when the coed attends post-secondary training. These are referred to as “refund of contributions,” or ROCs. Some other funds popping out of the plan for post-secondary training are known as “academic help funds,” or EAPs. This consists of the revenue, beneficial properties and CESGs within the RESP.

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.
An RESP is a tax-deferred financial savings plan that enables dad and mom (or others) to contribute as much as $50,000 per little one to avoid wasting for post-secondary training. Photograph by Getty Pictures/iStockphoto

At first look, it may appear engaging to solely withdraw ROCs, since they’re merely non-taxable, but when the objective is to cut back the household’s taxes all through the complete course of the children’ research, it’s in all probability higher to take some EAPs every year to completely use the coed’s fundamental private quantity and different accessible credit, such because the federal tuition credit score.

Take Isaac, a post-secondary scholar who earned no revenue in 2023. He might 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 coed’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 affordable. New for 2023, the federal government elevated the greenback quantity of EAPs that may be withdrawn within the first 13 weeks of training 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 training, however any remaining funds might be contributed to quite a lot of registered plans, every of which affords 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 residence financial savings account (FHSA).

The FHSA is a registered plan that offers first-time homebuyers the power to contribute $8,000 per 12 months, as much as a $40,000 lifetime restrict, to avoid wasting on a tax-free foundation in direction of the acquisition of a qualifying residence in Canada. The FHSA combines one of the best function of an RRSP, a tax-deductible contribution, with essentially the most engaging function of a TFSA, the tax-free withdrawal of all contributions, funding revenue or progress earned within the account, when funds are used to purchase a primary residence.

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For college students, similar to with RRSP contributions, the FHSA deduction needn’t be taken within the 12 months it’s made, however might be indefinitely carried ahead and deducted in a later tax 12 months when the coed could also be in a better tax bracket.

Take into account Jake, who’s in his last 12 months of post-secondary research. Whereas at school, he labored half time and summers, and, after paying for the price of his research and residing bills, he has $8,000 remaining. He might contribute that to an FHSA in 2023, and save that deduction for a later 12 months when he’s in a better tax bracket. This is able to give him a head begin towards saving for a down cost ought to he in the end purchase a house inside 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.

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