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Canada’s education tax breaks benefit rich kids: report

Dale Jackson
Pay Day

Federal and provincial governments dole out billions of dollar in tax credits each year to help students pay for college and university. Turns out the rich kids are getting the lion's share.

A new report released by the C.D. Howe Institute finds the system short changes the low-income students that need the most help.

Here are two key findings:

  • 10 per cent of people using education tax credits have an income above $80,000, but they receive 42 per cent of the total credits.
  • About half have incomes below $30,000, but they only get 7 per cent of the total credits.

Roughly $1.6 billion in education tax credits come from the Federal government alone to help students pay for everything from tuition to textbooks. According to the report the credits are worth more than $2,000 a year for the average university student. That’s about 40 per cent of the average university tuition fee.

The problem

The author of the report, Wilfred Laurier University associate professor of economics Christine Neill, says the inequity exists because education tax credits are considered by the Canada Revenue Agency to be non-refundable. That means the tax owed on eligible education expenses can be no lower than zero – they can’t owe you.

That’s not an issue for high-income individuals with a higher proportional tax bill. Although they still pay reduced tax on the items, they will also get the maximum dollar benefit from the credit.

But for lower income individuals who pay less in tax, the refunds are limited to zero and the total dollar benefit is capped.

It’s common for low income families or struggling students to bring their income tax bill to zero. Every Canadian is entitled to claim a basic personal amount of about $11,000. If, for example, an individual earned $13,000 in a year he or she would only be taxed on $2,000 ($13,000 minus the basic personal amount). Tax credits and deductions could easily surpass $2,000 but any credits beyond that are non refundable.

The study argues the non-refundable tax credits would be fully beneficial to those students only when they graduate, start making money and move into a higher tax bracket – not when they are really needed.

The simple solution

Christine Neill’s solution is to make education tax credits refundable regardless of income. In other words, a person who earns $13,000 in a year and accumulates $2,500 in credits would receive a $500 refund.

In the end, more government funds would be shifted to lower-income students, when they need them most, without costing taxpayers an extra dime.

The bigger picture

Tuition fees have almost doubled in the past 18 years. A recent Federal government study says at the current rate, the cost of an undergraduate degree away from home will top $100,000 in the next 18 years.

At the same time the importance of a post-secondary education continues to increase as low-skilled jobs make their way overseas due to our supposed skills gap.

Other education funding programs are available for some but the cards are becoming increasingly stacked against students who lack the means to advance themselves.  A recent BMO survey says right now more than one-in-five students expect to graduate with over $40,000 in debt.

Yet, governments continue to deal the best hands to the rich not only through tax credits but programs such as the Registered Education Savings Plan (RESP). Under the plan a family with three children can get federal grants of up to $21,600 provided they can shell out $2,500 per child of their own money each year over the 18-year-life of the plan.

For many Canadians raising the initial cash is impossible.