Back to school planning

Back to school financial planning

August 26, 2016

It always hurts to think about back to school, even for those of us who are not students. Painfully, it suggests the end to our too-short summer.

If you have children heading to university, you may need to know about RESPs (Registered Education Savings Plans) and the rules that pertain to withdrawals and university funding. My Winnipeg Free Press colleague Joel Schlesinger had a great comprehensive article on August 13, 2016 on RESPs. I suggest you check that out.

Briefly, here are three things to remember about RESP withdrawals. The student needs to be enrolled in post-secondary education and must ask the institution for a form or letter called Proof of Enrolment. A tuition receipt is not adequate.

The withdrawal can come from three potential segments of the RESP – contributed capital, government grants, or investment growth. Withdrawals from capital are tax free at any time. Withdrawals from the grant or growth portion will be taxable to the student.

In the first 13 weeks of post-secondary education, the maximum withdrawal from growth and grants is $5,000.

Our usual advice is for people to withdraw from growth and grants first, while the student is in school and can take advantage of tuition and education credits to offset any tax that might otherwise be payable.

That way, in the future, there is little or no tax liability to worry about when the remaining funds are withdrawn.

By the way, the money that is withdrawn from an RESP does not have to be specifically spent on tuition, supplies or other verifiable education expenses, and no receipts are required.

My number one back-to-school 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, similar to what happens to some people in January, when the overspending December.

Tax breaks for students

Tax credit amounts for students include:

• Tuition tax credit

• Education amount

• Textbook credit

Bad news is that the new federal government is eliminating the education and tuition amounts, half in 2016 and completely in 2017. These are all non-refundable credits, which means that they reduce tax that a taxpayer would otherwise be paying, but will not create a refund if the taxpayer is not paying any tax.

A student with less than $10,000 or so of total income will 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 spouse, or a supporting 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 giving the student a paper copy), and many only allow them to be printed once. My suggestion is to only print it at the time you will be using it, next spring when preparing the tax returns.

We also suggest that students file a tax return, even if there are no taxes due. This builds up eligibility for future RRSP contributions at a rate of 18% of any employment or self-employment income, carryforwards of unused credits and deductions. Low income students may also be eligible for refundable credits and grants, like the GST (HST) tax credit at age 19.

Let’s try to think of back-to-school as the start of a new adventure, rather than the end of great weather, warm nights, light traffic flows and the more gentle way of life.

Uh huh.

Have a great weekend!

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

Please consult legal, tax and investment experts for advice on your unique situation.

David Christianson, BA, CFP, R.F.P., TEP, CIM is a Certified Financial Planner and senior advisor with Christianson Wealth Advisors, a Senior Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.