Principal Issues: Can a taxpayer choose not to take the education or tuition tax credit and claim a foreign tax credit instead?
Position: The education and tuition tax credits are permissive and not mandatory. However, the formula for determining the carry forward of the credit will grind down the carry forward to the extent of tax payable whether or not the education credit is taken or not.
Reasons: Calculation under 118.61(1).
XXXXXXXXXX 2011-041669 Andrea Boyle, CGA
March 5, 2012
Dear XXXXXXXXXX :
Re: Interaction between the Tuition and Education Tax Credits and the Foreign Tax Credit
I am writing in reply to your letter of August 2011, regarding the deduction of tuition and education amounts and the foreign tax credit. We apologise for the delay in our response.
You stated that when you filed your 2008 return your available foreign tax credits were applied prior to claiming tuition and education credits. The rationale for doing this was that foreign tax credits cannot be carried forward to subsequent years whereas the tuition and education amounts are permissible non-mandatory deductions, and can be carried forward to a subsequent year. In assessing your returns for the 2008-2010 taxation years the Canada Revenue Agency ("CRA") has not applied the foreign tax credits and tuition and education amounts in the manner in which you filed. You have asked for clarification on the ordering of applying these credits.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Page 27 of CRA Pamphlet P105 Students and Income Tax (available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/p105/README.html) states the following under the heading "Transferring and carrying forward amounts":
You can carry forward and claim in a future year the part of your tuition, education, and textbook amounts you cannot use (and do not transfer) for the year. However, if you carry forward an amount, you will not be able to transfer it to anyone. You have to claim your carry-forward amount in the first year that you have to pay income tax. To calculate the amount you are carrying forward, you have to file an income tax return and complete Schedule 11.
The phrase "in the first year that you have to pay income tax", while not quite the wording in the Act, makes it clear that where income tax is payable, the credit must be applied. The wording of section 118.61(1) is more specific in that it states that it is not merely income tax payable that is the issue but it is "...tax payable under this Part for the year if no amount were deductible under this Division (other than an amount deductible under this section and any of sections 118 to 118.05, 118.3 and 118.7)".
More specifically, the manner of determining the tuition and education amount carry forward is found under section 118.61 of the Act. Generally, the carry forward mechanism is designed to address the situation in which a student does not have sufficient tax owing against which to apply the credits. Under 118.61(1) of the Act, the balance of an individual's unused tuition, textbook and education tax credits at the end of a taxation year is the amount determined by the formula
A + (B - C) - (D + E)
where
A is the amount determined under this subsection in respect of the individual at the end of the preceding taxation year;
B is the total of all amounts each of which may be deducted under section 118.5 or 118.6 in computing the individual's tax payable under this Part for the year;
C is the lesser of the value of B and the amount that would be the individual's tax payable under this Part for the year if no amount were deductible under this Division (other than an amount deductible under this section and any of sections 118 to 118.05, 118.3 and 118.7);
D is the amount that the individual may deduct under subsection (2) for the year; and
E is the tuition, textbook and education tax credits transferred for the year by the individual to the individual's spouse, common-law partner, parent or grandparent.
In this formula, variable B is the amount that may be deducted for the current year and variable "C" is the lesser of the value of B and the amount that would be the individual's tax payable under Part I for the year if no amount were deductible under Division E other than credits specifically exempted. Since the foreign tax credit is calculated under Division E (section 126) a foreign tax credit does not reduce individual's tax payable under Part I for the purposes of determining the value of "C".
What this means is that, where there is income tax payable by a taxpayer against which a foreign tax credit is applied, the tuition and education credit available for carry forward balance will be ground down by the formula in section 118.61 of the Act regardless of whether or not the tuition and education credit is utilized. In other words, even though an individual uses the foreign tax credit to reduce his or her tax payable, the amount of the education/tuition tax credit available for carry forward would nevertheless be reduced by the amount that could have been claimed had the foreign tax credit not been claimed.
As such, in the situation which you have described, there would be no advantage for a taxpayer to apply foreign tax credits prior to claiming tuition and education credits.
We trust that these comments will be of assistance.
Yours truly,
Doug Watson
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch