When deciding which deadline to meet – the essay or the tax return – post-secondary students might choose to keep Canada Revenue Agency waiting rather than the instructor. Time and money are limited, and there probably won’t be taxes owing anyway, so why not skip a year?
Hardeep Gill, JR Shaw School of Business personal finance instructor (and co-author of the textbook Personal Finance), disagrees with that approach to money management. In the near-term, “you’re leaving money on the table if you don’t file,” he says, in the form of tax credits, deductions and refunds.
It might also compromise financial futures. Gill knows that gathering receipts and filling out forms aren’t necessarily a priority compared to studies, but he also knows there’s a return on the investment in the form of both dollars and, well, sense.
“Awareness of how our tax system works gives you more control over your finances, but also gives you an opportunity to plan your life in a way that will maximize a scarce resource, which is your money,” says Gill. Here’s his advice on how students can get the most out of that resource (and set parents’ minds at ease).
Each year of filing a tax return generates RRSP contribution room – determined as a percentage of income – which accumulates. If a student makes $10,000 at a summer job, the current contribution rate of 18% means $1,800 worth of room. That carries forward if unused.
In the future, “If you get a windfall, you have that extra room you created,” says Gill. That windfall then has 2 benefits: it’s saved for retirement and, because RRSP investments can be deducted from your annual income, it can reduce taxes.
Defer the deduction
That deduction may not help much in post-secondary years, when limited earnings often place students in lower tax brackets. Instead, it can be claimed later, when the student-turned-grad makes a higher salary and can benefit from reducing taxable income or even being knocked down a tax bracket.
If students earned income, they can lower their taxes by claiming credits for costs such as transit passes, childcare expenses, interest paid on certain student loans and more. If they made no income, the credit for tuition, books and education can be passed along to parents (who might be convinced to give it back).
Always keep your receipts, says Gill. “You can’t put something on [a tax return] that you don’t have a copy of.”
What’s more, those credits can offset the taxes on a valuable source of income: the Registered Education Savings Plan mom and dad set aside. Filing a return can help you make the most of it. “Your parents didn’t save that money so that you can get taxed on it,” says Gill.
Avoid the bank of mom and dad
Unless they’re handing out interest-free loans, “Don’t borrow money from your parents,” says Gill, but not just because he has 3 kids. Instead, if necessary, students should get a loan administered under the Canada Student Loans Act, the Canada Student Financial Assistance Act or the Apprentice Loans Act. Interest paid on these loans, and some provincial ones, are eligible for a tax credit.
Bank loans and lines of credit are not – which means restructuring debt after post-secondary can cost students more at tax time if they end up paying back someone other than the government. “If you’re going to pay interest anyway you may as well deduct it,” says Gill.
Get in the habit
Learning to file a tax return early on is a lesson that will serve students all their lives, suggests Gill. It takes the mystery out of the process and builds behaviours that, even if hard to practice in busy post-secondary years, will pay off in the long term. “It’s asking a lot,” says Gill, but “it’s creating habit.”