Transfer can be tricky
As the older kids begin to pack for their return to school, parents fret about the escalating cost of tuition and how much financial support they'll be able to provide for post-secondary studies.
Many parents look forward to at least a partial break courtesy of the tax man in the form of the tuition, education and textbook tax credit transfer.
Under the tax rules, students who don't need to use all their tuition, education and textbook tax credits to reduce their tax payable to zero can transfer up to $5,000 to a spouse, partner, parent or grandparent, regardless of whether he or she contributed financially towards the student's education.
Of course, students do have the option of saving their unused credits to apply to their own taxes payable in a future year rather than transferring them to a parent, but you can bet that a student may only get away with this once before he/she likely finds them-self cut off from parental financial assistance in subsequent years.
With both federal and provincial credits available, a $5,000 transfer could be worth over $1,250 (25%) to a parent, depending on the parent's province of residence.
With that number in mind, put yourself in the shoes of Calgary parent David Zaluski whose daughter Lara graduated from high school in 2007 and was accepted as a student at the American Academy of Dramatic Arts (AADA) in New York.
Mr. Zaluski paid just under $20,000 in tuition fees for Lara for 2007 and claimed a tax credit of $5,000 from the tuition, education and text book amount transferred from Lara.
Much to Mr. Zaluksi's surprise, the Canada Revenue Agency disallowed the $5,000 tax credit, finding that Lara was "not in attendance in a course at a university leading to a degree," one of the conditions of the Income Tax Act.
In May, Mr. Zaluski took his case to Tax Court, arguing that AADA does indeed confer a degree titled Associate of Occupational Studies upon successful completion of its program and thus he should be allowed to claim the $5,000 transferred credit.
To bolster his case, Mr. Zaluski testified that AADA has been approved both by Ontario and the federal government as an educational institution for which funding is available to students who qualify.
Unfortunately for Mr. Zaluski, the judge, citing an earlier case, concluded that AADA did not meet the definition of "university outside Canada" for the purposes of the tax credit because it doesn't confer degrees "usually granted by universities, that is a doctorate degree, a master degree or at minimum, degrees at the baccalaureate level or its equivalent."
Since Lara could not obtain a bachelor degree without transferring to another college or university to complete her studies, she wasn't eligible to claim -- or transfer -- her tuition, education and textbook credits to her dad.