Principal Issues: Can a taxpayer choose not to take the education or tuition tax credit?
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 credit is taken.
September 13, 2004
SUMMERSIDE TC HEADQUARTERS Income Tax Rulings Attention: Glen McInnis Directorate Renée Shields (613) 948-5273
2004-009026
Tuition and Education Tax Credits
This is in response to your memorandum of August 5, 2004 regarding the deduction of tuition and education amounts. Your memorandum referenced the 2003 return of XXXXXXXXXX (the "Taxpayer") and included a letter and attachments from her representatives.
In discussion with the Taxpayer's representative, we pointed out the correct manner of determining the tuition and education amount carry forward based on the proposed amendments to section 118.61 of the Income Tax Act (the "Act"). The representative acknowledged the misinterpretation and the resulting incorrect calculation. However, the representative indicated that his remaining concern was that the Notice of Assessment for the Taxpayer for the year in question imposed the utilization of the credits, which the Taxpayer did not wish to do.
During our conversation on September 1, 2004 (Shields/McInnis), you asked for our comments on whether a taxpayer can choose not to apply the education or tuition tax credit in a particular year. With respect to the tuition credit, section 118.5(1) of the Act provides that, "For the purpose of computing the tax payable under this Part by an individual for a taxation year, there may be deducted..." Similarly, with respect to the education credit, subsection 118.6(2) of the Act provides that, "There may be deducted in computing an individual's tax payable under this Part for a taxation year..." Accordingly, we confirm that the tuition and education tax credits are permissive and not mandatory.
The carry forward is designed to address the situation in which a student does not have sufficient tax owing against which to apply the credit. We have pointed out to the Taxpayer's representative that where there is tax owing by a taxpayer, the credit available for carry forward will be ground down by the formula in section 118.61 of the Act regardless of whether or not the credit is utilized. A simplistic example may assist in understanding this scenario.
Let us assume that an individual has combined education and tuition amounts of $15,000. This equates to tuition & education credits of $2,400. This is the first year that the individual has attended university such that there is no prior balance of unused credits. The individual's tax payable (based on the proposed amendment to factor "C" in the equation) is $350.
A + (B-C) - (D+E) is the formula prescribed by section 118.62 of the Act to calculate the unused tuition and education tax credits available for carry forward.
In our example, the variables would therefore be:
A= $0 (since this is the first year this individual attended university)
B= $2,400 (total tuition/education credits for the year)
C= $350 (lesser of tuition/education credits for the year and tax payable per section 118.61 of the Act)
D= $0 (lesser of unused credits at the end of the preceding year and tax payable in the year per paragraph 118.61(2)(b) of the Act)
E= $0 (tuition/education credits transferred)
Accordingly, if:
Available carryforward = A + (B-C) - (D+E) = $0 + ($2,400-350) - ($0 +$0) = $2,050
This example shows that even though the individual may choose to use other credits to reduce his or her tax payable (for example a foreign tax credit), the amount of the education/tuition tax credit available for carry forward would be reduced.
As requested, we have enclosed the documentation you provided to us in connection with your inquiry.
We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Roxane Brazeau-LeBlond, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
Enclosure