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Tax-saving tips make cost of education easier to bear

In the summer of 1994, Mike McElroy, of West Lake Hills, Tex., made an appeal to the city council to allow him to keep his pet donkey. You see, city regulations didn't allow residents to keep donkeys at home. Mr. McElroy simply wanted to keep his pet donkey, Pearl, at his place.

"This is a great opportunity for our kids and other kids who come to see us to be able to recognize and identify manure, which will help them in the future. Children need, at an early age, to be able to identify manure," he said.

Now, the last time I asked my son, Winston, what he wants to be when he grows up, a manure expert wasn't on his list. As it turns out, my son wants to be an astronaut, which is quite a noble profession.

One thing's for sure, it's going to take a good education to get him there. Chances are pretty good that your kids will also need an education if they hope to succeed in the future. And if your kids are going to get an education, you might as well take advantage of as many tax breaks as possible along the way. Here are a few to consider.

1. Credit for tuition and education amounts.

Students can claim a tax credit based on the actual tuition for the calendar year, plus an education amount based on $400 a month of full-time or $120 a month of part-time enrolment. These amounts can be transferred to a spouse, parent, or grandparent (to a maximum of $5,000 for tuition) if the student can't use the amounts to reduce taxes to nil for the year. Rather than transferring the amounts, the student can choose to carry them forward for use in a future year when the amounts will be needed to reduce taxes.

2. Credit for student loan interest.

A student can claim a credit for interest paid in the year on student loans made under the Canada Student Loans Act, Canada Student Financial Assistance Act, or similar provincial law.

Sorry, a loan from Aunt Bertha won't qualify. This credit cannot be transferred, but the student can choose to carry forward the credit for up to five years to be used in a future year.

3. Exemption for scholarships and the like.

Scholarships, fellowships, bursaries, and certain prizes are taxable to students, but the first $3,000 of these amounts are exempt from tax.

4. Deduct moving costs.

A student can claim a deduction for the costs of moving to school (or home again) to the extent he earns income while in the new location. Taxable scholarships, bursaries, and the like count as income here. The usual rules for moving expenses will apply.

Sorry, parents can't claim those moving costs instead of the student, even if mom and dad paid the costs.

5. File a tax return for advantages.

Every student should file a tax return because: (1) they'll create registered retirement savings plan contribution room for any earned income (it generally makes sense to contribute to an RRSP, but to save the deduction for a future year when the student's marginal tax rate will be higher, resulting in greater tax savings), (2) they'll be entitled to a GST credit worth over $200 once reaching age 19, and (3) your province may offer sales tax or other refundable credits once the student reaches age of majority.

6. Lend money to a student.

If you own a corporation it's possible for your company to lend money to your child to attend school. The loan will be included in the income of the student (who may pay little or no tax on the amount). And get this: Your child will be entitled to a deduction when the money is repaid later. This deduction can come at a time when your child is working full time and could use the deduction.

7. Pay a student for certain things.

You can pay a child who has reached age 18 in the year to either help in a family move, or to look after younger kids age 16 or under in the year. Your adult child will report the income, but these payments can be deductible to you as moving or child care expenses, and your child can use those dollars to attend school.

8. Make use of registered education savings plans.

Contributing to an RESP makes a lot of sense when you consider the Canada education savings grants of up to $400 annually paid by the government into the plan when you contribute. Over an 18-year period, those grants will provide an increase in your effective rate of return in the plan by 1.87 per cent annually, assuming the plan otherwise grows at 7 per cent annually.

Be sure to check out Canada Customs and Revenue Agency's pamphlet P105 "Students and Income Tax" available at for good information.

Tim Cestnick, FCA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, National Tax Services, at AIC Ltd.

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