Canadian Personal Finance Blog

My mother clipped an article from the Globe and Mail by Tim Cestnick about Student Tax planning that I thought had some really good points in it. As I have a new University student in the family who has been working for the past year part time, much of his advice I already knew about but a great deal was news to me.

Withholding taxes

As long as your student is not working in a co-op job or the like that makes a lucrative salary, most student shouldn’t have any taxes (Federal, or provincial) deducted from their part time jobs. Fill in whatever forms you need to make sure that does not happen (no point in loaning the government that money).

Scholarship and Bursaries

I did not know that in 2006 Scholarships, fellowships and bursaries became Tax-Free. This is no longer income was news to me, and I was very impressed to read that one. I would even be happier if my child received a scholarship, but she is working hard on that one (I hope). 

Research Grants

If you travel and incur expenses for your taxed research grant, you can claim those. Not pertinent to me, but still useful to know.

Tuition and Education Credits

I knew that we could claim tuition on taxes (even though it is about 1/3 of the total pay out for my daughter living away from home). There is also a $400 a month education credit (you’ll get a form stating the student was at the institution FULL TIME) that you can claim as well (up to $5,000 of these credits can be transferred to me, so that is GREAT). 

Text Books

Another HUGE cost for University (especially if you buy them new) are books. In 2006 there was a tax credit for books, student fees and equipment which is $65 a month for a full time student. Good idea, be even better if the books were deductible, but I guess that is too much to ask for. 

Student Loan Interest

The interest on accredited loans are deductible as well (make sure you have complete documentation on this). 

Moving Expenses?

If your child moves over 40 KM to or from school and then has a job, evidently you can make this claim, but I would look closer into this one and check with the CRA before you do anything.

Get more RRSP Room

It’s important to put in a Tax return even if your child doesn’t have to pay anything, because you are starting to build up their RRSP allowance. I remember one  year when I was in co-op, I made far too much money and was going to have to pay taxes, but simply put money in an RRSP in February and after a waiting period cashed it out and ended up losing about $50 in admin fees, but effectively floated that income to the next tax year, not sure the logistics of this now. 

Remember also the GST credit comes into play once your child is over 18 as well. 

Rent costs

If your child is renting an apartment, remember that tax credit if you live in Ontario. It would be even nicer if I could write off their residence fees, because those are a BIG expense as well. Sounds like a question for my candidates, whenever they knock on my door. 

All in all a very informative article.

One of my favorite topics to discuss with anyone political is: why is it that the Canadian Tax system seems to be skewed against the single income family?

Most of the time the response I get back is a lot of “baffle gab” about supporting families through social programs, etc., however that is not what I am saying.

If you gave a couple (be they married or not) an ability to pool their income and income split (as they currently can with pension income after age 55), you might be surprised at what comes of this. If I was able to income split with my spouse (when I was employed at least) the amount of tax I would have paid would have been staggeringly less than I did as a single income earner, even with the paltry tax credit for the “Married tax credit”.

I have done numerous articles on this one (and have caused some interesting discussions in the comments as well), so I won’t rehash the numbers, but I think if the government gave families or couples the capability to income split or income balance (if that made sense) and had the concept of the Household Income, I tihnk they might see:

• More single income families, since it would make more sense for a spouse to stay home instead of taking a lower paying job.
• Higher employment numbers, since there would be many people who would stop looking for work, as they are more of a family asset as a tax shelter.

Haven’t had any politicos appear on my doorstep yet, but given I am home all day long, I feel sorry for the first one to show up on my doorstep.

Monday I spent a good 2 hours with a Personal Finance Planner, that was made available to me by my soon to be former employer, and their right management team. I won’t divulge the name of the planner, just because I don’t feel right doing a “review” of their services, since I got them for a large discount.

Scope of Discussions

The scope of my discussions with this gentleman was mostly around what are my options to do with my severance package and what the tax implications would be if I withdrew from my company’s pension plan.

Bill (not the financial planners real first name) collected a fair amount of background information from us, which made my wife a little nervous (since she had not met him before, but I had at a group financial planning session). We were fairly strict in what we did and did not tell him, since we wanted the scope of the discussions to stay mostly around the task at hand (i.e. tax implications of my severance package).

Planning Session

After collecting the information, the financial planner had an already set up Excel spreadsheet with the tax scenarios possible for me and my family. Bill has done this with many (more than 100) former employees of my soon to be former employer. He also had a massive plasma display that he ran this on to show my wife and I what he was calculating. My wife pointed out I will never be getting a display like that for my computer.

He started by filling in some of the numbers he gave me about my yearly income, the size of the severance package, and the size of my pension pay out.

The variables to be dealt with are:

1. Do I take my severance package completely when it is made available?
2. Do I use the RRSP room I have now or later?
3. My employer was gracious enough to allow me to split my severance and take some now, and then some on January 1, 2009, do I do that?
4. What are the implications of me withdrawing from the pension plan?

The financial planner went through all of these scenarios, gave his opinions and dealt with my and my wife’s questions in a professional way.

Outcomes

I think my wife and I had already decided what to do, but we didn’t really have a clear plan of why or how much, I think now we do (at least I hope we do). Simply sitting down with someone with enough Tax savvy and background to “bounce ideas” off was just great and I think I got my moneys worth out of it (remember I got this at a large discount).

Bill did point out that his company does offer many services, and that if I did need them, I should call him (and I wouldn’t expect anything less from a small business owner), but he was not pushy and understood the audience he was dealing with.

Bill also told me his hourly rate, and I think I might think a bit before going back to him, and make sure I was much better prepared than I was this time, because his services do not come cheap (but then again, you pay for expertise, I have always found).

All in all a positive experience, and I would recommend dealing with a financial planner, with NO ties to any insurance company or mutual fund company. Make sure the planner charges you by the hour, for the service he is offering, so you know where he or she is making their money (mostly).

So today I had an excellent presentation about the financial aspects of my severance from my employer, by a C.A. who is also a Financial Planner. He brought up several very interesting points, one that I had heard about but didn’t understand and another that I wasn’t even aware of (and caused me to write down many more questions for my one on one session with him in the near future).

RRSP Severance Rollover

Up until 1996 the rules for moving severance packages into RRSPs was pretty wide open, but then in 1996 the rules changed and you were not allowed to simply plow your severance directly into your RRSP (if you didn’t have room to put the severance allowance in your RRSP). The accommodation for folks like me that were still employed (and have been) by the same employer before 1996 (and haven’t received a severance package), I get a $2000 per year RRSP “bump up” for every year I worked for my employer before 1996 (and working in the year, could entail only 1 days work, too bad I didn’t work there as a Co-Op student).

For me this means that since I was employed from 1988 to 2008, I get 8 years counting in there or an RRSP bump up (for this one time) of $16,000 which I can put some of my severance package in (which is a good thing).  Since it is so late in the year, any dollar I shelter most likely saves me 46 cents of taxes I don’t have to pay on this year’s CRA tax forms (sorry Mr. Harper).

Severance Income is the Worst Kind of Income

Well, if there is such a thing as bad income, a severance package is that, because you get a T-4A for this income, but this income will not increase your RRSP room for the year, and it is not really counted as income per say (other than the fact that it gets TAXed like it is income). What I am trying to say is that severance is not an EARNED Income, thus you don’t pay CPP or EI premiums against it, but you don’t get RRSP room for it either.  I didn’t know that one either.

Another Idea the Lifelong Learning Program

Instead of simply cashing in RRSPs to pay for going back to school, the government has set up the Lifelong Learning Plan (LLP) where you can withdraw $10,000 in a  year and $20,000 total over 4 years to help pay for your schooling. There are rules for you to repay your RRSP the amount you borrowed to pay for your education, but I thought this would be a really good idea (for me or my wife). I don’t think this is something I will use now, but it is an interesting concept.

Best Joke to Say Around Former High Tech Workers

The presenter had a great comment for the section we skimmed over, “So this should be a short section, it’s about what to do if you make profits on your stock options during your severance period…”, everyone in the room burst out laughing, as did the instructor. If you aren’t in High Tech, you might not get it, but if you saw the Simpsons episode where it showed a high tech company giving out Stock Options from a toilet paper roller, you might get the joke.

I learned a lot today.