Tuition Fees and Charitable Donations Paid to Privately Supported Secular and Religious Schools
1. Tuition fees paid to an educational institution in Canada are deductible by the student in accordance with subsection 60(f) of the Income Tax Act. Such fees are not considered charitable donations and official receipts designed for charitable donations may not be issued for such tuition fees even though the educational institution may be a registered Canadian charitable organization as defined in paragraph 110(8)(c) of the Act.
2. The purpose of this circular is to explain two exceptions to the above rule where a portion or all of an amount paid to a school, other than a post-secondary institution or a designated educational institution (see Appendix A), may be considered as a donation. The two types of such schools which give rise to these special circumstances are:
(a) those which teach exclusively religion, and
(b) those which operate in a dual capacity providing both secular (academic) and religious education.
3. If such a school teaches exclusively religion and thereby operates solely for the advancement of religion, payments for students attending that school are not considered to be tuition fees but will be considered as valid donations and, providing the school is a registered Canadian charitable organization, official receipts for charitable donations may be issued for such payments.
4. The provisions of the Income Tax Act do not permit a deduction, as a charitable donation, of an mount paid to a school for academic tuition, whether the amount was paid for set fees or was a voluntary contribution. A gift, to be allowable within the concept of paragraph 110(1)(a) of the Act, must be a voluntary transference of property without consideration. The consideration here is the academic training received by the children attending the school. On the other hand religious training is not viewed as consideration for purposes of the definition of a gift.
5. School fees are normally based on the costs of operation. However, there are some schools in Canada, usually connected with a church, which do not levy set fees and operate solely through contributions of parents or guardians and other members of the church. These schools, which are subject to the inspection of provincial educational authorities, operate in a dual capacity providing both secular and religious education.
6. Under certain circumstances receipts for charitable donations may be issued for a portion of an amount paid to attend schools, other than post-secondary institutions or designated educational institutions, which operate in this dual capacity. There are two methods of calculating the donation portion of amounts paid, depending on how the school maintains its accounting records.
7. The most favourable treatment will be received where the school can and does segregate the cost of operating the secular portion of the school and the cost of providing religious training. Under this method, the net cost of operating the secular portion of the school is to be pro-rated over the number of pupils enrolled during the school year to determine a “cost per pupil” for the secular training. An official donation receipt can be issued for that portion of a payment which is in excess of the pro-rated “cost per pupil” for academic training. If a taxpayer has more than one child in attendance at the school, the amount to be deducted from his total payment, to determine the donation portion, is the “cost per pupil” for academic training multiplied by the number of his children enrolled during the school year.
8. The net cost of operating the secular portion of the school will be determined to be the total operating costs of that portion of the school for a school year (excluding capital expenditures and depreciation) less miscellaneous income, grants received and donations received from persons with no children in attendance, unless such grants or donations were designated for a capital purpose. “Cost per pupil” would be the above described cost divided by the number of students enrolled during the school year.
9. Where such a school which operates in a dual capacity does not or cannot segregate the cost of operating the secular portion of the school and the cost of providing religious training, a donation receipt can be issued only for that part of the payment which is in excess of the net operating “cost per pupil” of the whole school for a school year. The net operating cost of the whole school in this case will be the total operating costs of the school including both secular and religious education (excluding capital expenditures and depreciation) less miscellaneous income, grants and donations from persons with no children in attendance, unless such grants or donations were designated for capital purposes. “Cost per pupil” will be the above described cost divided by the number of students enrolled during the school year. For taxpayers with more than one child in attendance, the rule in the last sentence of paragraph 7 above will apply using the “cost per pupil” of the whole school.
10. For purposes of either of the above methods, where a payment has been made to a school before December 31st of a school year and the school must issue an official donation receipt for taxation purposes before the “cost per pupil” for the school year can be determined, the school may use the “cost per pupil” of the previous school year, if the school operated in that previous year.
11. The school must be prepared to substantiate that the “cost per pupil” for a school year has been determined from the books and records of the school in accordance with the above policy.
12. A payment to such a school by a person who is neither the parents or guardian of a pupil who attends such a school and for which no benefit is derived qualifies in full as a donation.
“For the purposes of paragraphs 1(g) and (h),
(a) “designated educational institution” means
(i) an educational institution in Canada that is
(A) a university, college or other educational institution designated by the Lieutenant Governor in Council of a province as a specified educational institution under the Canada Student Loans Act or recognized by the Minister of Education of the Province of Quebec for the purposes of the Students Loans and Scholarships Act of the Province of Quebec, or
(B) certified by the Minister of Manpower and Immigration to be an educational institution by which courses are conducted that provide or improve the qualifications of a person for employment or for the carrying on of a business or profession,
(ii) a university outside Canada at which the student referred to in paragraph (1)(g) or (h), as the case may be, was enrolled in a course, of not less than 13 consecutive weeks duration, leading to a degree, or
(iii) if the student referred to in paragraph (1)(g) or (h), as the case may be, resided, during the whole of the year referred to therein, in Canada near the boundary between Canada and the United States, an educational institution in the United States to which he commuted that is a university, college or other educational institution providing courses at a post-secondary school level;”
Disclaimer: This abstract are taken from CRA interpretation Bulatin and should not be considered as tax advice.
If you are a Canadian Resident (for income tax purpose) who has been 18 years or older since 2009, you’d have a TFSA limit of $46,500 today. TFSA is an important tool for your long term savings. There are a few things you must keep in mind while operating a TFSA account.
1) Over-contribution: Over-contribution could be very costly, any amount that you over-contribute is subject to 1% tax every month until you withdraw the over-contribution. To put this into perspective, if you have over-contributed $10,000 in January of a given year, and you have not withdrawn the over-contribution throughout the year, you will have a TFSA tax of $1,200. And it does not end here, if you do not file the TFSA return and pay the taxes, you may become subject to other fines, penalties and interests. There are several reason for this mistake:
a. You simply over contribute without calculating your TFSA limit
b. You calculated an amount in your limit where in that year you were not eligible to get TFSA limit:
b.i. If you are under age of 18, you do not accumulate TFSA limit
b.ii. If you are non-resident of Canada in any given year, you do not accumulate TFSA limit.
c. You withdraw an amount from your TFSA in the year that only gets restored in the next calendar year. Therefore, if you re-contribute that same amount in the same year and you have already reached your contribution limit, it will be considered as over-contribution.
2) Naming beneficiary instead of successor holder: As a successor holder that person becomes the new holder of your TFSA and its tax free status is automatically preserved, on the other hand as a beneficiary there will be no tax implication in case of death but there will be extra paper work and any income earned after the death and increase in FMV or income will be subject to tax.
3) Foreign Income: Foreign dividend paid to a TFSA is subject to withholding tax, a non-registered account is a better choice for foreign dividend paying investment. A non-registered account will enable taxpayer to claim foreign tax credit to offset the withholding tax deducted.
4) Market loss: Market losses can impact your contribution room. If there is a change in the value of your entire TFSA account, it will impact your withholding, and you can recontribute only what you withhold excluding the new limits. Fortunately, the opposite is true for gains; therefore, if you close all your accounts, and open a new one, ensure that you are only contributing up to your limit. You should contact your tax specialist to ensure the proper limit.
5) TFSA investment must be eligible: You need to make sure the investment you are putting in your TFSA is eligible for TFSA investment. The securities that are not traded through recognized stock exchange will not be eligible for TFSA investment. This may result in tax implications.
Friday, 18 March 2016
Update From Revenue Quebec: Child Care Expenses
The Québec Minister of Finance announced in his budget speech on March 17, 2016, the additional contribution in respect of the second child is reduced by 50% for child care expenses.
This measure is retroactive to 2015. There will be no change in the calculation in Appendix I or the tax return for 2015 to reflect the announced reduction.
However, Revenue Québec will correct all 2015 tax returns so that parents affected by this change will quickly benefit from the reduction.
Furthermore, childcare costs, including the additional contribution, qualify for the deduction for child care expenses in the federal tax return. Following this announcement, the Canada Revenue Agency will also provide patches to all tax returns in 2015.
Thursday, 10 March 2016
Are you an Employee of International Tax Exempt Organization?
If you work for an International organization (Ex: UN, NATO, etc), your income may generally be exempt from taxation on any income earned from such organizations. You should check your eligibility ensuring the compliance under ITA sub-paragraph 110(1) (F) (III). As a Canadian Resident you may still require to file your tax return. If you require to file your income tax, you will have to add this revenue to the total income for the competition of net income. However, to arrive to the taxable income you will be able to subtract it under the above mentioned ITA.
Monday, 7 March 2016
Childcare & Tax Credit
Did you know the limits on certain amounts of the tax credit for childcare expenses and tax credit for children’s activities have been increased for taxation year 2015 in Quebec.
The limit on childcare expenses paid for a child with a severe and prolonged impairment in mental or physical functions has been increased from $10,000 to $11,000. The limit for such a child born after December 31, 1998, but before January 1, 2009, has been increased from $4,000 to $5,000.
The maximum amount of childcare expenses paid to a boarding school or camp has been increased from $175 to $200 per week for an eligible child born after December 31, 2008, from $100 to $125 per week for any other eligible child, and from $250 to $275 per week for a child of any age with a severe and prolonged impairment in mental or physical functions.
The maximum eligible registration or membership fees have been increased from $200 to $300 per child, for a maximum tax credit of $60 per child, or $120 if the child has a severe and prolonged impairment in mental or physical functions.
Tuesday, 28 October 2014
Recently Canada Revenue Agency issued an alert for RRSP scheme that could put you in trouble. Investing in schemes that promise you tax free withdrawals from RRSPs (Registered Retirement Saving Plan) and RRIFs (Registered Retirement Income Fund) could result in the loss of your full retirement savings.
What is an RRSP scheme and some example of it:
RRSP scheme is usually a type of investment promotion offering a “tax-free” withdrawal to access your RRSP funds directly or indirectly. Some examples of observed RRSP schemes by CRA (Canada Revenue Agency) have included:
– Withdrawal of funds from an RRSP or RRIF without paying tax , where promoters often promise to return part of individual’s investment using offshore debit, credit card, offshore bank accounts, or loan-back arrangements.
– Income tax receipts providing deduction of three or more amount contributed to an
RRSP and unrealistic returns on investments.
Promoters of these types of schemes direct the owners of RRSP or RRIF to purchase a particular investment through a specific trustee. The investment could be share in a company, a part in a co-operative, a mortgage, or other type of investments.
CRA is highly recommending people not to invest in such schemes that could result in losing your entire saving to fraudulent promoters. By doing so, not only you lose your savings also your tax return get reassessed. Over the past years to now, CRA has reassessed over 5,000 investors who participated in these schemes resulting in additional taxable income roughly $250million.
Are you thinking of investing your money? It is very important that you get independent legal and tax advice from a tax professional that is not connected to investment organization or promoters. If you are approached with such offer and not sure it is one of such scheme that revenue agencies are already issued alert, give us a call to book a consulting session with us, it will save you lots of money in tax, interest and gross negligence penalty.
Wednesday, 4 June 2014
Dividends Vs Salary
Salary Vs Dividend:
Most of my clients who set up a corporation have asked me how to take out money either by dividend or salary. Dividend and salary, both have their advantage and disadvantages.
Salary Advantages and Disadvantages:
– Possible to contribute to RRSP
– Require to contribute to CPP/QPP
– Salary or Bonus expenses are deductible for Corporation
– Income splitting is available by paying salary to related employees such as wife or children
Dividend Advantages and Disadvantages:
– Dividends are taxed at a lower rate than salary which may result in paying less personal tax
– No required to contribute to CPP/QPP, therefore saving money
o Downside of only receiving dividend is even if corporation owner would like to contribute to CPP/QPP it is not possible
o Receiving only dividend omit possibility to contribute to RRSP to reduce income or defer taxes
o Receiving only divided can destroy possibility of other personal deduction such as child care expenses
– Paying divided is simpler compare to paying salary as do not require calculating or remitting Deduction at sources.
The best solution depends on individual need of each of the business owners. Often time corporations pay out salary and bonuses to ensure that its Net Income do not exceed small business dedication limit ($500K for 2013-2014 tax year). In summary, salary or divided depends on business owners personal financial circumstances, such as income level, cash flow needs, corporate income, personal income tax deduction, net personal assets, net personal other income etc.
Pauls & Associates
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