When most people think about the ways that governments help to subsidize the cost of attending college and university, they think of student loan and grant programs. But it is the variety of federal and provincial tax credits directed at post-secondary students and their families that have actually ended up doing more of the heavy lifting.
Tuition, education and textbook tax credits cost the federal treasury about $1.6 billion in 2012 — more than twice the net cost of the Canada Student Loans Program, for instance. Provincial tax credits are in addition to that aid.
How much are these tax credits worth? A lot, as it turns out. The federal tuition tax credit amounts to 15 per cent of the tuition and other eligible fees paid. Add to that the education tax credit, which is a claim of $400 for each month of full-time attendance ($120 a month for part-timers). The federal tax credit amounts to 15 per cent of that total. There's also a federal textbook credit of $65 a month for full-timers and $20 a month for part-timers. Again, the credit is worth 15 per cent of that total.
Any tax credits that students don't need to reduce their tax owing to zero can be transferred to parents, grandparents, spouses or common law partners. They also can be carried forward indefinitely to a time when the student has tax owing.
Worth $2,000 a year
Depending on the province, federal and provincial tax credits have the effect of lowering the annual university tuition bill by at least a third — effectively, dropping the net cost of a year's tuition from $6,000 to about $4,000. In the case of college tuition, the fees are less, but the tax credits, proportionately, can be worth even more.
'I regularly talk to people who are surprised by the existence or value of tax credits.'- Christine Neill, economist
All well and good, you may say. But more and more analysts say the current tax credit system is just not good public policy. In an attention-getting C.D. Howe Institute paper published last November, Wilfrid Laurier University economist Christine Neill argues that these post-secondary tax breaks should be rethought because they are largely ineffective in accomplishing two of the purported goals of these policies: 1) to increase post-secondary enrolment; and 2) to fairly provide financial support to post-secondary students in need when they need it.
Neill cites research that suggests that many students and their parents — especially those from low-income households — know about the "sticker price" of annual tuition bills but don't know nearly as much, if anything, about the specific range of tax credits and other programs available to reduce the net cost of going to college or university.
"I regularly talk to people who are surprised by the existence or value of tax credits," she said in an interview with CBCNews.ca. "You're more likely to be aware of these things if you've gone to college or university or if people around you have gone to college or university. If that's not the case, the awareness is not necessarily there."
Need not a factor
Neill isn't alone in pointing out that tax credits are so-called universal subsidies: they are handed out regardless of income or financial need. So, a big chunk of the financial benefits from these tax credits goes to wealthier students and their families.
"Since kids from better-off backgrounds are more likely to go to [college or university], tax credit expenditure, on aggregate, mostly ends up in the hands of people from the top two income quartiles," notes Alex Usher, president of Higher Education Strategy Associates, a Toronto-based research and consultancy group. "Grants, on the other hand, are more likely to end up in the hands of people from the bottom two quartiles."
'Education tax credits are most likely to benefit those who already have enough money to afford post-secondary education.'- Canadian Federation of Students policy statement
Other analysts, including the main student groups, complain that tax credits do nothing to reduce the up-front costs of post-secondary education. The benefits of tax credits come, at the earliest, in the following spring — after the tuition bills are paid — when the tax return is filed and a refund issued. The payoff may be further delayed if the student chooses to carry forward the credit to a future year.
"In order to derive any benefit from the education tax credits, students and their families must first find the resources to pay for tuition fees, textbooks and living expenses and hope that a portion will be refunded sometime in the future," says a policy statement from the Canadian Federation of Students. "As a result, education tax credits are most likely to benefit those who already have enough money to afford post-secondary education."
So, given the perceived deficiencies of the current system, what are some of the ways it could be improved?
Suggested solutions include:
- Making the tax credits refundable. Currently, the tuition and education/textbook tax credits are non-refundable, meaning that they can't immediately benefit students (or their parents) who don't owe any tax. "Making the credits refundable is an easy policy option," says Neill. "A refundable tax credit can reduce your tax below zero and provide a refund. Lower-income students would get more up-front, and administratively, it's relatively simple." She notes that the GST/HST tax credit, for instance, is already refundable.
- Reducing or eliminating tuition and education/textbook tax credits in favour of non-repayable grants. The Canadian Federation of Students says if the money Ottawa spent on tax credits and saving programs like RESPs was instead used for up-front grants, "it would turn every dollar loaned by the Canada Student Loans Program into a non-repayable grant," thus "greatly reducing" the amount of student debt owed to the federal government.
- Reducing or getting rid of student tax credits in favour of lower tuition fees. This suggestion, from the Ottawa-based Canadian Centre for Policy Alternatives, is aimed in part at getting help to needy students at the start of the school year. "Like other forms of after-the-fact assistance implemented by a number of the provinces, this [aid] would be much more effective and immediate applied to the up-front costs in the form of a significant fee reduction," write Erika Shaker and David Macdonald in a 2013 position paper. This idea is also supported by the Canadian Federation of Students.
- Rolling back tuition hikes and boosting student-aid funding in return for a reduction or elimination of some tax credits (combines the previous two suggestions). Quebec did exactly this after the student protests of 2012. The province abolished proposed tuition hikes and increased student aid. It paid for this by reducing the tuition tax-credit rate from 20 per cent to eight per cent, effective as of the end of the winter 2013 session.
- Scrapping the education and textbook tax credits in favour of direct grants to RESPs. This was proposed in the 2011 federal Liberal Party election platform. The Liberals proposed replacing the education and textbook tax credits (but not the tuition tax credit) with a Canadian Learning Passport, which would deposit $1,000 every year for four years ($1,500 a year for low-income families) into every high school student's Registered Education Savings Plan. It would be paid out in annual instalments "at the start of the school year, when students need it most," according to the platform document.
- Allowing tax credits to be transferred to educational institutions. This idea comes from Alex Usher of Higher Education Strategy Associates. He points out in a November 2013 blog posting that if students were able to transfer their unused tax credits to their college or university, instead of just to their parents, grandparents or spouses, "the institution could provide an instant rebate and then claim the money back from the government itself. Then we'd really be cooking with gas."
There's been no shortage of spilled ink and vigorous debate about the steadily rising cost of tuition fees. Considerably less attention is paid to the growing but often hidden world of student tax credits that are meant to defray part of those costs. But given the perceived shortcomings of the current system, many observers say it's time politicians re-examined the way this aid is delivered so it better accomplishes the twin goals of making the financial help more effective — and more equitable.
| Federal Student Tax Credits | |||
| Credit | Worth | Transferable? | Carry Forward? |
| Tuition tax credit | 15% of eligible tuition and ancillary fees | Yes, to parents, grandparents, spouses or common law partner | Yes, indefinitely, but only by student |
| Education tax credit | Can claim $400/month (full-time) or $120/month (part-time). Credit is worth 15% of total. | Yes, to parents, grandparents, spouses or common law partner | Yes, indefinitely, but only by student |
| Textbook tax credit | Can claim $65/month (full-time) or $20/month (part-time). Credit is worth 15% of total. | Yes, to parents, grandparents, spouses or common law partner | Yes, indefinitely, but only by student |
| Student loan tax credit | Students and former students can claim a 15% tax credit on student loan program interest paid in current year and previous five years. | No | Yes, up to 5 years |
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