Study, Party, Taxes? The 101 on Student Taxes

All references to the ‘Act’ mean the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended. All references to the ‘Regulations’ mean the Income Tax Regulations. The following should not be construed as legal nor tax advice. Consultation with your usual tax/legal professional is advised.

Good morning Toronto! As those college and university acceptances (hopefully) roll in from all over the world, it’s important for students to keep one thing in mind: taxes. As you start choosing where to spend the next 3-4 years of your life, let’s take a moment to break down everything you need to know.

Students over 16 years that are attending a university, college, or trade school, can take advantage of the Tuition Tax Credit. The tax credit is calculated by multiplying eligible tuition amounts and the percentage of the lowest tax bracket. Your educational institution will provide Form T2202 to certify the eligible tuition amount paid, which is then inputted onto Schedule 11 of your tax return.

This tax credit can must first offset any income taxes already paid/owed by the student. If there is any amount left over, it can be transferred to a qualifying family member (QFM) – a spouse/common-law partner, your parents/grandparents, and/or your partner’s parents/grandparents – to a maximum of $5000 of tuition transferred per year. Unlike other tax credits, the Tuition Tax Credit cannot be carried forward if you need to pay taxes – you must use it.

For students considered a resident, or transferring amount to a QFM that is resident in Ontario, Saskatchewan, or Alberta: Keep in mind that the tuition tax credit does not offset provincial taxes owed.

But wait! One small problem. Victoria lived in Ontario, but attended school in BC. Obviously, you cannot be considered to be resident in 2 separate provinces for tax purposes. According to Revenue Canada:

1.3 Therefore, the province you have the most residency ties in on December 31 of each year is the province you will be resident of for provincial tax purposes.
– Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status

Significant residency ties to a province include owning/renting a residence, and having a spouse/common law partner/dependent(s) in that province. Secondary residency ties include social ties, driver’s licenses, and where your personal effects are, etc. These ‘tests’ of residency are the same in determining residency status for Canadians studying abroad.

Now for Canadians studying abroad. For the purposes of this section, a Canadian is a Permanent Resident* (PR) or citizen of Canada. Disclaimer: It gets very messy, very quick.

Before we continue, note that according to Canadian immigration law, PRs must spend 740 days every 5 years in Canada to retain their PR status. There are no provisions for maintaining your PR status if you study, and remain abroad, for extended periods of time.

To start, your residency status for Canadian tax purposes is dependent on the country you are studying in, if that country has a tax treaty with Canada, and your individual residency ties to Canada. Many popular countries that Canadians study in, such as the US and UK, have tax treaties with Canada. According to the Income Tax Act:

Notwithstanding any other provision of this Act (other than paragraph 126(1.1)(a)), a person is deemed not to be resident in Canada at a time if, at that time, the person would, but for this subsection and any tax treaty, be resident in Canada for the purposes of this Act but is, under a tax treaty with another country, resident in the other country and not resident in Canada.
- §205(5), Income Tax Act

Technically, it is possible for a person to be considered a tax resident by Canada (by maintaining significant residency ties) and another foreign nation, therefore being subject to taxation in these jurisdictions. Thus, most tax treaties Canada signs with foreign nations (the 'Contracting States') have so-called ‘tie-breaker rules’ to definitively determine which country an individual is a resident of for tax purposes and treaty purposes. These tiebreaker rules are usually contained in Article 4 (IV) of the treaty, and generally include (but may differ from treaty to treaty) a;

• Permanent Home Test: In which Contracting State does an individual have a permanent home always available to them, that will be available ‘at all times, continuously'?
• Center of vital interests Test: To which Contracting State is an individual's social and economic ties closer?
• Habitual Abode Test: In which Contracting State does the individual regularly live?
• Citizenship Test: In which Contracting State does the individual hold citizenship of?

These tiebreaker rules follow the order of precedence laid above. For example, to use the Citizenship Test, the other 3 tests must have all been tried, and tied. In the event that the 4th test (Citizenship) fails (either due to the individual holding none OR both of the Contracting States' citizenship), the individual's tax residence shall be decided mutually between the tax authority of the two countries.

As most Canadian students usually have a parent/guardian’s house to return to in Canada, they would generally be considered to be factual residents for Canadian tax purposes.

As a factual resident, your income – Canadian and foreign – would be taxed as if you never left Canada. You would continue to pay any applicable federal and provincial taxes. To reduce double taxation, if you paid taxes abroad, you may be able to use Foreign Tax Credits to offset your Canadian taxes. You continue to be eligible for benefits 'regular' Canadian residents receive, such as the GST/HST credit.

Should the tie-breaker rules consider you to be a resident in the foreign jurisdiction, ITA 250(5) states that you will be considered to be a deemed non-resident for Canadian tax purposes.

Whether you are a factual resident or deemed non-resident, while you study abroad, you are still eligible for the Tuition Tax Credit (subject to the conditions described earlier), provided your school certifies the amount paid – converted to CAD – on Form TL11. However, you cannot claim benefits that are reserved for Canadian residents, such as the GST/HST credit.

In a nutshell: It depends! International tax law depends heavily on the treaty signed (if any) between Canada and the foreign nation. Canadian students considering studying abroad should engage a professional for advice before making a final decision.

How can we help? KLee Tax specializes in filing tax returns for individuals, businesses, and corporations. Whether you are working your first job, running a business, or an NPO looking to make a difference, you can be sure that KLee Tax will be there for your tax needs, when and where you need us.

Unsure of where to start? Be sure to reach out below!