It's hard to believe that summer is over and September has arrived. It means we need to change our focus from beaches to books. One of the biggest issues for our older children may be their post secondary choice of study. One of the largest considerations for parents is to make use of tax efficient education expense planning.
Tax efficient education expense planning is all about putting money in the hands of the students in your life to pay for an education in a manner that can result ina tax savings to you, no tax to your children, or both. Essentially, you’re causing the Canada Revenue Agency to partner with you in paying for their education.
Children On Staff
As a small business owner looking for ways to save tax, consider employing your children. You can pay them reasonable wages which are then deductible against your business income. If your child’s total income is under the 2016 basic personal amount ($11,474), they won’t pay any income tax. They can then use this money to pay for their post-secondary education. That basically means that you will have deducted your children’s educational costs from your business income. If you don’t have a business, why not consider starting a part-time business to create the opportunity to claim deductions like this.
If business owners are incorporated, it’s possible for your company to lend money to your child to pay for an education. The amount will be taxed in the hands of your child if it’s not repaid within one year of the company’s year-end. No problem. If your children’s total income is under the 2016 basic personal amount, including the loan, then they won’t pay income tax.
The best part? When your children graduate and starts working, they can repay the loan at that time and will receive a deduction for the amount repaid. No tax is paid when the loan is made but this becomes a deduction later when your children can use it.
“Income tax returns are the most imaginative fiction being written today.”Herman Wouk
Making A Move
If parents plan to move in the near future and are eligible to deduct the costs (e.g. for work), they can consider paying a child who is 18 or older to help in the move. If you’re otherwise eligible to deduct moving expenses, you’ll be able to deduct these wages. Your child can use the money to contribute toward an education. While your child will have to report the income, they won’t pay tax if their taxable income is less than the 2016 basic personal amount.
Scholarships can be received tax-free to your children and won’t come from your pocket. Parents should encourage and assist their children I applying for various scholarships up to one year ahead of attending school. Check out the following websites:
Prudent parents can also pay their adult children (18 or older) to look after the younger siblings (16 or younger) and may be able to claim the amount paid as child-care expenses if you otherwise qualify to deduct child-care costs. Your child can use the money to help pay for school, and won’t face tax if her taxable income is under the 2016 basic personal amount.
“The hardest thing to understand in the world is the income tax.”Albert Einstein
Most parents know they should consider a Registered Education Savings Plan (RESP) to set aside funds for their children. Contributions can come with a Canada Education Savings Grant (CESG)which basically attracts a 20% credit on up to $2,500 contributed each year.
What some parents don't know is that they can also consider setting up in-trust accounts for their minor children and invest in them for growth. Any capital gains over time will be taxed in the hands of your children, who will likely pay little or no tax. Your children can use the funds for education later although they aren't obligated to. Although, I think parents would have something to say about that.
“The best measure of a man’s honesty isn’t his income tax return. It’s the zero adjust on his bathroom scale.”Arthur C. Clarke
Transferring Tax Credits
A student is entitled to tuition, education and textbook tax credits (the latter two disappear in 2017 and later years). These can be transferred to a parent or spouse if the student doesn’t need them to reduce taxes to zero.
Finding fiscal efficiencies in today’s world is becoming more challenging. Our children, as students, need to put on their thinking caps and become a sleuth to find savings and moderate their spending. Parents are a good mentor. Working with a Financial Life Planner can also add to that equation. They can help in Keeping Life Current.