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Tuition credits -- Transfer or Not?
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For a student who can't use all tuition credits and have so-called transferable unused credits, should you leave them to future years or transfer them to your parents/spouse?
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The short answer is, transferring the credits is better in most cases, here is why:
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- You get the money earlier;
- If there is any change of tax law, the lowest tax rate usually goes down instead of up. Tuition credits take the lowest tax rate,
so if you use them in a future year and if the tax rate has gone down at that time, you will get less;
- Most provinces now have tax reductions for low income earners, in a future year if your income is at the starting point of tax reduction,
you will waste some or all of the credits. The reason is, based on CRA's tax form, you have to use your tuition credits all the way to reduce
your taxes to zero right at line 5856, regardless the tax credits afterwards. You can't claim a lesser amount.
Your taxes could be zero without tuition credits, but you have to use and waste them. Certain other non-refundable credits could also cause this
kind of waste. For example, in Ontario,
if you have a child and your income is between 16,000 to 30,000, you could waste up to $11,090.00 of your provincial
tuition credits;
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One possible exception is for Ontario, if the transferee's income is in the middle, but you expect more than 80K
income next year yourself, then you should leave your provincial credits to yourself, you might get 56% more savings from the same credits next year.
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If you have decided to transfer your tuition credits to someone, the software can decide how much transfer will make the best use of the credits. If you can
transfer your credits to more than one person, you can use the software to test who gets your transfer will be the best. Federally, same amount of tuition
transfer have the same dollar value for every one, as long as he/she can take it. But the assumption is not true for provincial credits in Ontario, PEI and
Nova Scotia, whose surtaxes and tax reductions actually affect the credit rate.
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There is one exception for federal tuition transfer too, if someone has to pay minimum tax, the transfer to this person will actually
cause him/her to pay more taxes in the current year. The situation is rare and complicated so we do not elaborate here.
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We also assume that by transferring your tuition credits to someone else, he/she will pass the extra tax savings back to you, or you will still be happy if
he/she keeps the money. If it is not the case, then forget the transfer.
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