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Back-to-school adventure shouldn't involve September credit hangover

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This is the most painful column I write.

Columns on taxes or CRA penalties hurt, but taxes are a fact of life. And I can usually suggest ways to reduce taxes.

No, the column that hurts the most is talking about back-to-school season, meaning the inevitable end to our all-too-short summer is looming on the horizon.

Oh, well, best get on with it.

Tip No. 1 is to avoid being sucked into overspending on back-to-school clothes, supplies and accessories. Try to set a budget and stick with it. Unless you have unlimited funds, it's very easy to overdo it and have a credit-card hangover in September.

RESP

People with university-aged kids may be thinking now about Registered Education Savings Plan (RESP) withdrawals. There are subtleties to those rules that can fool people, so let's review them.

The maximum first withdrawal from an RESP is $5,000. After that, there is no limit. The money does not have to be specifically spent on tuition, supplies or other verifiable education expenses, and no receipts are required.

But to request a withdrawal from the financial institution holding the RESP, the student must receive from the post-secondary educational institution a form or letter called Proof of Enrolment, on the institution's letterhead.

This is different than a receipt for tuition paid, and must be specifically requested.

When planning your withdrawal strategy, remember any deposits you made to the RESP plan can be withdrawn tax-free any time. The financial institution keeps track of how much of your account comprises original contributions versus government grants and investments.

The government-grant portion and any investment growth is taxable to the student when withdrawn. You specify the proportion from each area for each withdrawal.

Assuming the student only has income from summer and part-time jobs, we generally recommend withdrawals from the growth and grant portion while they are in school. The government grants and growth are thus withdrawn while the student has education credits and deductions.

If there are any RESP monies remaining after graduation when the student is working and taxable, these amounts can be withdrawn tax-free.

 

Tax breaks for students

Tax credit amounts for students include:

  • Tuition tax credit
  • Education amount
  • Textbook credit

These are all non-refundable credits, meaning they will reduce tax a taxpayer would otherwise owe, but won't create a refund if the taxpayer is not paying any tax.

A student with less than $10,000 or so of total income will likely not be paying any taxes, so be careful not to waste these credits.

CRA allows a transfer of up to $5,000 of these tax credits onto the tax return of a supporting spouse, parent or grandparent. In that situation, the taxes for the supporting person are reduced. Alternatively, the student can carry these amounts forward to offset taxes in a future year, instead of transferring them.

Claiming the education-related credits requires an official receipt, in the form of a T2202. Most universities now only provide these online (as opposed to paper copies), and many only allow them to be printed once. Kids, this means it is very inconvenient for your parent or your tax preparer if you lose that one-time receipt. My suggestion is to only print it at the time you will be using it, next March.

We suggest the student file a tax return, even if there are no taxes due. This builds up eligibility for future RRSP contributions at a rate of 18 per cent of any employment or self-employment income, eligibility for future TFSA contributions, carryforwards of unused credits and deductions, and other valuable information.

Low-income students may also be eligible for refundable credits and grants, such as the GST (HST) tax credit at age 19.

I guess it's best to think of back-to-school as the start of a new adventure, rather than the end of Manitoba as tropical paradise. I'll try.

 

David Christianson, BA, CFP, R.F.P., TEP, CIM is a financial planner and adviser with Christianson Wealth Advisors, a vice -president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.

Republished from the Winnipeg Free Press print edition August 22, 2014 B16

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