Making tuition tax credits fairer

Post-secondary tax credits cost the federal and provincial governments billions of dollars each year, but are not distributed equitably and may have no proven effect in boosting enrolment, says the C.D. Howe Institute.

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Tuition and education/textbook tax credits cost the federal government alone around $1.6 billion in 2012 – a sum greater than the net cost of the Canada Student Loan Program, says Christine Neill, who wrote the study, What You Don’t Know Can’t Help You: Lessons of Behavioural Economics for Tax-Based Student Aid.

“There are good reasons to conclude these tax credits are poor policy, as currently designed,” says Neill.

“The immediate benefits of the credits go disproportionately to students from relatively well-off families, who are not relatively sensitive to the costs of postsecondary education. Students from lower-income families benefit from them only after they have finished their education and have enough taxable income to claim the credit,” she adds.

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To fix the imbalance, she says making the tax credits refundable instead of non-refundable would go a long way to making them more efficient and equitable. A non-refundable tax credit can’t reduce the amount of tax owed to less than zero, but a refundable tax credit can reduce tax payable below zero and provide a refund.

This change would provide a more immediate benefit to students from low-income families, she says.

The study also shows:

• 10% of tax filers have an income above $80,000, but they account for about 42% of total tuition and education credits transferred to parents
• About half of all tax filers have incomes below $30,000, but they use only 7% of all tuition and education credits transferred to parents
• Very few postsecondary students are over the age of 40, but just over 20% of all tax benefits paid to students or former students go to this population group.

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Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.