Archive for August, 2015

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Seven Ways to Fund Higher Education – Part 2

The cost of a post-secondary education is rising faster than the rate of inflation, making higher learning more of a stretch for Canadian students and their families. Last time we discussed four ways to help parents save money for education:

  • Save the Universal Child Care Benefit (UCCB)
  • Leverage the RRSP opportunity
  • Make a TFSA contribution
  • Save in Trust for your child’s education.

Here are three more strategies for you to consider:

1. Save the Child Tax Benefit. The amount of Child Tax Benefit (CTB) received for each child will depend on the number of children in the family and the family net income each year, and can be quite significant. For example, over the eighteen years that the family is eligible for the CTB, the total amount received can be more than $80,000 for a low-income family. If the CTB and provincial supplement, if applicable, are saved in a separate account in the name of the child, any income earned will be taxable to the child and will, therefore, usually not be subject to tax.

2. Claim Child Care Expenses Wisely. Costs of child care may be deductible for parents who go back to school or carry on research for which a grant was received. Expenses are deductible for the care of dependent children who were under the age of 16 (at any time during the year) or who are physically or mentally infirm. Full time students are limited to claiming:

  • $125 for each child age seven to 16 for which the Disability Amount cannot be claimed, plus
  • $200 per child under seven for which the Disability Amount cannot be claimed, plus
  • $275 per disabled child

times the number of weeks of full-time attendance. Part-time students are limited to the above amounts times the number of months of part-time attendance.

3. Use Tax Advantages Along the Way. Tuition, education and textbook expenses qualify for a non-refundable tax credit, which must be claimed by the student first to reduce taxes payable. If not taxable, the student may transfer this credit to a supporting individual. Other credits for students include the opportunity to deduct certain student loan interest amounts.

Unfortunately tuition fees and textbook expenses for primary or secondary school, including private school, are not deductible. However, tuition fees paid to schools that teach religion exclusively are considered to be a charitable donation if the school is a registered Canadian charitable organization that issues official charitable receipts. Certain schools operate in a dual capacity providing both secular and religious education. They may issue a charitable donation receipt for a portion of the fees paid under certain circumstances.

The tax system also allows for the deduction of student loan interest, costs of public transit and, in some cases, moving expenses. Checking in with a Tax Services Specialist can pay off when there is a student in the family.


Seven Great Ways to Fund Your Child’s Education, First of two parts

Average undergraduate tuition fees have risen to just under $6000 a year in Canada since 2010; an increase of 16% in just five years. This rate of increase (3%) has outpaced the rate of inflation (average 2%). At this pace, post-secondary education for a child born this year will cost over $10,000 a year. Following are four great ways to start saving now; next time, we’ll cover three more for a total of seven great strategies:

1. Save the UCCB. With the delivery of the enhanced UCCB (Universal Child Care Benefit) payments last month, frugal parents who invest the bonus will have education worries covered – for at least a year. Over an 18 year period, the total receivable is $17,280, less taxes payable, if any. The pre-tax payment is $60 a month ($720 annually) for children 6 to 17 years of age and $120 a month ($1440) for children up to the age of 6. If the UCCB is saved in a separate account in the name of the child, any earnings on the deposits will be taxable to the child and will likely be received on a tax-free basis maximizing accumulations.

2. Leverage The RRSP Opportunity. Few are aware that tax free withdrawals can be made from an RRSP under the Lifelong Learning Plan. This is a great way to leverage RRSP accumulations when educational opportunities arise. Of course, the RRSP deposit itself will generate tax savings that can be used for education funding too, provided the contributor was taxable. Note, however, that the new contributions must remain in the plan for at least 90 days or there will be no deduction for the contribution.

Making an RRSP contribution for students whose net income is over the Basic Personal Amount is wise. . .a parent (or other supporting individual) may be able to transfer more of the tuition, education and textbook credits available to their own return.

3. The Tax Free Savings Account is a great option too. You must be 18 and a resident of Canada to open the account. It’s a perfect place for grandparents to save to fund their grandchildren’s education. There is no deduction for the deposit, but the earnings are tax free and you never lose the TFSA contribution room. That means you can replenish the TFSA to save for grandchild 2, 3 or 4.

4. Savings “In Trust”. Parents may also simply save money in a non-registered account held “in trust” in the name of the child. Planning investments to earn capital gains will help you avoid the Attribution Rules, which otherwise require adults to report interest and dividends earned on funds transferred to a minor.


Investments in Limited Partnerships by Registered Charities

Tax changes in the 2015 Federal Budget may bring real value and a level playing field for investments under the stewardship of a charity, making it easier for the good work they do to have a more immediate impact on pressing social and economic needs in Canada. Specifically, registered charities may now hold an interest as high as 20% in a limited partnership, which provides a new diversification opportunity in portfolio management.

Prior to the budget, charitable organizations and public (not private) foundations could engage in business-like activities, as long as they qualified as a related business, linked but subordinate to the main purposes of the charity, and run substantially by volunteers.
Further, investment activities themselves have not been considered “business activities,” but rather an “administrative function” under current law. But a charity that held an interest in a partnership had been considered to be carrying on a business, with the result that few registered charities were able to hold an interest in a limited partnership.

The new rules have relaxed, but restricted, this exception for charities. Specifically, the following criteria must be in place to qualify for investments in a limited partnership:

  • Limited Liability: As a member of a partnership the liability of the charity is limited under any law governing the partnership arrangement.
  • Limited Interest: The charity and all non-arm’s length entities may hold only 20% or less of the total interests in the limited partnership.
  •  Deeming Rule: In addition, to determine this ownership percentage, the fair market value of each member’s interest in the partnerships must be compared to the fair market value of all interests in the partnership. These rules are similar to those governing interests held by private foundations.
  • Non-Arm’s Length Relationships: The charity must deal at arm’s length with each general partner of the limited partnership.
  • CAAAs: Investments in limited partnerships by registered Canadian amateur athletic associations will also qualify under these rules.

Other rules of note: Programs remain charitable as long as they enable the two essential characteristics of charity—altruism and public benefit. If these two elements are lost, then the activities become business activities.

According to Policy Statement CPS-019, business activities are defined as commercial activities carried on by entity on a regular or continuous basis. Charities can carry on certain business-like activities, provided they are not conducted on a regular or continuous basis, although, by CRA’s own admission, the rules are unclear on the matter. They cite a one-time sponsorship as an example of a non-business activity, but “making sales or providing services on a regular daily or even weekly basis, with the operation requiring ongoing care and attention, would likely be viewed as ‘carrying on’ a business.”

Under the new rules in the Income Tax Act, a registered charity will not be considered to be carrying on a business solely because it acquires or holds an interest in a limited partnership. These rules apply for investments in limited partnerships made or acquired on or after Budget Day.


Finance Canada Releases Details Of Small Biz Charity Break

Finance Canada has released the fine print that will both introduce and limit a new tax break, when arm’s length sales of real property situated in Canada or the shares of a private small business corporation are donated to charity by a resident taxpayer, effective the 2017 tax year.

The provision was first announced in the April 21, 2015, budget; but, as the preamble to the section indicates, the government may already be having misgivings on the implementation of the provisions. The legal detail was released, amongst other changes, on July 31, 2015, and consultations on the matters are being sought.

The transaction will qualify for arm’s length transactions only (that is, when the property is not sold to family or affiliated businesses), and when cash proceeds are donated to a registered charity within 30 days. The disposition must be to a person or a partnership, not another corporation or a trust. It also cannot involve a series of transactions to circumvent arm’s length or non-affiliation requirements under the Income Tax Act, which are described in detail in order to ensure anti-avoidance rules are followed.

Where the donation results from a deemed disposition on the death of a taxpayer (as per Section 70 of the Income Tax Act), the deceased must have been a resident of Canada immediately before death and the graduated-rate estate must make the cash donation to a qualified charity within 30 days, and report the disposition and the donation according to recently introduced new rules.

The formula for calculating the qualifying tax exemption and eligible donation is also limited by “Variable C,” which is the amount of the advantage, if any, as defined in subsection 248(32), which includes the total value of any property, services, compensation, use or other benefits to which the donor of the property is entitled.

In addition, any donation of flow-through shares will require adjustment for any charitable contribution under the new provisions.