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Saturday, January 21, 2012

Post-Secondary Education Outside Canada, Part 1

Post-Secondary Education Outside Canada, Part 1

A student who plans to enrol in a foreign university, college, or other post-secondary educational institution outside Canada should consider the Canadian tax implications as part of the potential cost or benefit of attending the foreign school. This article considers the student's residence status and her eligibility for Canadian income tax credits for tuition, education, and textbooks. A future article will discuss other tax issues, such as those relating to scholarships, fellowships and bursaries, moving costs, and RESPs.

Residence status. The student's residence for income tax purposes determines her obligation to file a Canadian income tax and benefit return for a particular year. Before leaving Canada to attend school, the student should consider whether the move will be temporary or whether residential ties with Canada will be severed permanently. In most cases, a student who attends a foreign education program is still a Canadian resident and must file a Canadian income tax return. However, Canadian income tax obligations should be reviewed every year; if the student ceases to be a Canadian resident, Canada's departure tax regime can trigger significant tax implications, particularly if the student holds shares in the family's private business.

Tax treaties and residence. Even if a student is a resident of the foreign country under its domestic tax law, she may still be considered a Canadian resident under the applicable tax treaty. Tax treaties contain tiebreaker rules designed to ensure that for tax purposes a taxpayer is deemed to be a resident of only one country and thus does not pay tax twice on the same income. Canada has tax treaties with many countries, including Australia, the United States, and the United Kingdom, which are common destinations for Canadian post-secondary students. If the student is deemed to be a Canadian resident under the relevant treaty, she must file a Canadian income tax return that reports her worldwide income for the particular taxation year.

Foreign schools that qualify for Canadian tax credits. For a student to be eligible to claim tuition, education, and textbook income tax credit amounts on her Canadian income tax return, the student's foreign school must qualify as a "university outside Canada." To qualify, the foreign school must (1) have authority to confer academic degrees of at least the bachelor's level or equivalent, according to the education standards of the country where it is located; (2) have an academic entrance requirement of at least secondary school matriculation; and (3) be organized for teaching, study, and research in the higher branches of learning. Institutions that the CRA accepts as qualifying are listed in schedule VIII of the regulations. If the school qualifies as a "university outside Canada," the student must forward one of the following forms to the school to have it complete the form and certify the eligible fees: form TL11A ("Tuition, Education, and Textbook Amounts Certificate--University Outside Canada") or form TL11C ("Tuition, Education, and Textbook Amounts Certificate--Commuter to the United States"). The completed form should be retained in the student's records--in case of an audit by the CRA--and need not be included in the student's tax return.

Eligibility for tuition tax credit. A non-refundable tuition fee tax credit is available only if (1) the course leads to a bachelor's degree or higher; (2) the course lasts at least three consecutive weeks (reduced from 13 weeks by federal Bill C-13, An Act To Implement Certain Provisions of the 2011 Budget as Updated on June 6, 2011 and Other Measures (SC 2011, c. 24); (3) while enrolled, the student is considered to be in full-time attendance; and (4) the tuition fees are eligible fees and have been paid. As long as the fees are eligible, there is no upper limit, but more than $100 in fees must be paid for the year to the institution. Eligible fees include admission fees, charges for the use of library or laboratory facilities, exemption fees, examination fees, application fees (but only if the student subsequently enrols), and charges for a degree. Non-eligible fees include fees for student activities (social or athletic), medical care or health services, transportation and parking, and board and lodging, and administrative penalties incurred when a student withdraws from a program or university. A tuition fee tax credit is available federally and in all provinces and territories.

Courses taken over the Internet normally do not qualify for the tuition fee tax credit. To be considered in full-time attendance, the student must be physically present at the institution or be present via scheduled interactive virtual classroom sessions. Courses for which students study largely at their own pace and for which assignments are submitted electronically using a correspondence method do not qualify for the tuition credit, but they may be eligible for the education and textbook tax credit.

Eligibility for education and textbook tax credits. To claim the federal education amount of $400 for each eligible month, the student must be a full-time student enrolled in a qualifying education program, and the course must last at least three consecutive weeks (reduced from 13 weeks by federal Bill C-13) and lead to a bachelor's degree or higher. A part-time student who is enrolled in a specified education program may be able to claim the federal education amount of $120 for each eligible month. The education credit does not require that the student be in full-time attendance, but she must be considered to be taking a full-time course load. A student who qualifies for the education credit as a full-time student may also claim a federal $65 textbook amount for each eligible month (a part-time student may claim $20 for each eligible month). All provinces and territories also offer an education tax credit (although Quebec has different rules), but only Nunavut and Yukon offer a textbook tax credit; the provinces and territories set their own amounts for these credits.

Living in Canada and commuting to a US educational institution. Some different rules apply if the student lives in Canada all year and commutes regularly to the United States to take courses--for example, a student who is enrolled in a teachers' college program. For the tuition credit, form TL11C must be completed and the fees paid must consist of eligible tuition fees of more than $100; the student need not be in full-time attendance. For a commuter, neither the tuition credit nor the education and textbook credit requires that the course last three consecutive weeks (reduced from 13 weeks by federal Bill C-13) or lead to a degree; otherwise, the requirements for those credits are the same as those for non-commuters who use form TL11A.

Transfer of unused tuition, education, and textbook credits. The tuition, education, and textbook credits must be first claimed on the student's personal tax return, even if the amounts were paid by someone else, such as a parent or grandparent. If the student cannot use the full amount paid, the unused portion may be transferred to the student's spouse, common-law partner, parent, or grandparent, or may be carried forward to a future year. In any given year a student can transfer a maximum of $5,000 of tuition, education, and textbook amounts earned in the year to the extent that the student does not require them to reduce her tax payable to nil. These rules apply federally and in all provinces and territories, except in Ontario, which has a different maximum, and in Quebec, which has different rules.

Brennan Caiella and Beth Webel
PricewaterhouseCoopers LLP, Hamilton

Canadian Tax Highlights
Volume 20, Number 1, January 2012
©2012, Canadian Tax Foundation

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