Whether it’s due to financial need or just for the experience, if your child attends university or college, chances are they’re going to work over the summer. Depending on what type of work your child does, both their tax situation and yours could be greatly impacted next year. Here’s what you need to know.
The Student’s Tax Return
If your child attends post-secondary studies, they likely don’t earn enough money to be required to file a return. However, it’s almost always a good idea to file one anyway for a number of reasons.
1. Claiming tuition and education/textbook credits.
Even if your child doesn’t need to use these deductions this year, claiming these large credits enables your child to use them in the future. When those years of hard work in university earn your child a good paying job, they’ll appreciate those banked credits.
2. GST/HST benefit payments.
Chances are that your child will qualify for GST/HST benefit payments during post-secondary years. In order to receive these quarterly payments when they turn 19, they must file a tax return.
3. RRSP contribution room.
Although saving for retirement might be a foreign concept to an 18 year old, filing a tax return starts the process. As soon as your child reports earned income, their RRSP contribution room begins to accumulate. And, if they are interested in contributing at an early age, they can make contributions now and claim them in future years. There’s no minimum age.
4. Another step into adulthood.
By teaching your child how to prepare their tax return, you’re also preparing them for independence. A basic understanding of income tax is a valuable tool not taught in most schools. If your kid can write a 3,000 word term paper on the French Revolution, explain macroeconomics, or program your new phone for you, they can certainly handle their own tax return (with a bit of guidance).
Self-Employment Implications
With all of the tuition and education credits available to post-secondary students, most working college kids receive refunds at tax time. Self-employed students may not fare so well. If your child decides to start their own business, be prepared to owe at tax time. How could a kid with $15,000 in tuition credits have a balance due? It’s not the income tax. It’s the CPP.
As soon as your child turns 18, they’re responsible for Canada Pension Plan contributions on earnings over $3500. If they’re an employee, these amounts will be deducted as part of their regular payroll deductions. If your child earns their income from self-employment, these contributions are collected at tax time. Additionally, the self-employed worker is responsible for both the employer’s and employee’s portion of the contributions.
Because CPP contributions owing are calculated based on the net earnings of the business (credits such as tuition don’t factor into the equation), it’s possible that your child may have zero income tax owing, have thousands in unused tuition credits, and still owe CPP at tax time.
The Parent’s Tax Return
Your child’s employment earnings will have an impact on your tax situation if they choose to transfer some of their tuition/education/textbook credits to you. This is because the amount that can be transferred depends on the child’s tax situation. If they earn enough money that they need to use some of those credits themselves, they won’t be able to transfer the maximum to you- regardless of the amount of credits they have leftover.
The maximum transferrable amount federally is actually $5000 minus what the student used. Provincial rates vary but the rule is still the same.
Let’s say your child’s tuition/education/ textbook credits for 2019 are $12,000. If your child needs $1,000 of these credits to lower their federal tax payable to zero, they’re only allowed to transfer $4,000 to you ($5,000 max – $1,000 = $4,000). The remaining $7,000 will be carried forward for future use by the student.
