Six ways to ease the cost of university
Tim Cestnick is president and CEO of WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
My son, Win, enters his first year of high school this week.
As I was reminiscing about my days in high school I told him about the all-nighters I used to pull to write a paper or study for an exam.
"Dad, that's crazy," he said. "Why didn't you just give yourself more time and study during normal hours?" he asked.
"Win," I said, "you have a lot to learn about dedication and hard work. "Did you know that, according to a report in the South China Morning Post, high school students in Hubei province allegedly hooked themselves up to an intravenous drip of amino acids to stay awake all night while they prepared for their national college entrance exam?"
Win looked at me like I was crazy.
"It beats Red Bull. Believe it, son," I added. "But, then again, if you can start earlier and give yourself more time, that works too."
I plan to teach my kids all there is to know about good study habits - and how to pay for that post-secondary education they will eventually pursue.
Today, I want to focus on getting money into your child's hands to pay for a post-secondary education.
Consider these ideas:
1. Lend a child money
If you own a corporation you can lend money to your child out of that corporation.
Your child will have to include that loan in his income, but he should pay little or no tax on that amount if he has little or no other income.
The fact is that you may be able to lend your child up to about $20,000 without tax given his basic personal exemption, tuition, education and textbook tax credits.
Once he graduates, he can pay back that loan and will be entitled to a deduction for the repayment at a time when he could use the tax savings.
2. Pay salaries or wages
If your child works in your business for any length of time you can pay reasonable salary or wages to her.
Suppose, for example, that you pay her $7,000 for work in the summer.
You'll be able to claim a deduction for the payments, and the amount will be included in your child's income.
She will likely pay little or no tax on this amount if she has little other income, and you could save taxes of about $3,250 (at the highest marginal tax rate in Ontario, for example).
3. Apply for tax-free money
Your child may be entitled to scholarships, fellowships, bursaries or study grants.
These amounts are generally exempt from tax if your child is eligible for the full-time education credit.
A part-time student may be exempt on the first $500 of these awards. Research grants are also generally tax-exempt unless they relate to post-doctoral research. It's best to apply for these awards one year in advance of the school year.
4. Pay for other services
You can pay your adult child to help in a move, or to look after your other children aged 16 or younger.
In either case, you'll be entitled to a deduction for these amounts as either moving expenses or child care costs, provided you otherwise meet the requirements to deduct these costs. Your child will likely pay little or no tax on this income, and can use the amounts to help pay for an education.
5. Avoid payroll source deductions
If your child is working and is expecting to attend school, he should complete Form TD1 when he commences his employment (but can complete it at any time) and report the various tax credits he'll be entitled to. This can ensure that he will not have any income taxes deducted at source from his pay. This is wise planning if he'd otherwise simply get a refund later of any taxes paid. By keeping the money in his hands today he can use it to contribute to his education costs.
6. Make use of family trusts
If you have a family trust you may have structured the trust so that it owns shares in an active operating business. If so, you'll be able to distribute dividends from your operating company to the family trust for the benefit of your adult children. If your child has no other source of income then he'll be entitled to receive up to about $47,900 in 2012 (varies by province) in dividends on a tax-free basis. Even if you don't have an operating business, Canadian dividends from a portfolio will provide the same opportunity to pay dividends subject to little or no tax. This will go a long way to paying for an education.