# Interplay between basic personal amounts and tuition credits



## Franko (Mar 31, 2012)

Hi all,

Fairly new poster here with some burning tax questions. I posted another thread in investing and the response was tremendously helpful, so I thought I'd throw out a few questions here too 

So, the situation:

I recently graduated, having worked for 6 months of 2012. I have a large amount of tuition credit from many years of school, close to $60k in each of federal and provincial (Alberta) credit (So technically 120k total?). My gross income for 2012 will be around $60k.

What I'm wondering is:

How is the basic personal amount applied? ie: Say for Alberta's provincial tax, I'd be taxed 10% of my $60k earned, but the basic personal amount is $17k. Does that mean I pay 10% of 43k (60-17k)?

Then, does tuition credit apply after the basic personal amount? Am I able to apply a large portion of my $60k tuition credit towards the $43k that's still taxable? If this is how it works, then it seems like I'll be getting an enormous tax refund for 2012, right? I'd essentially not be paying any tax, with my tuition cred swallowing it all up. Is this right or am I mistaken somewhere?

And finally - am I able to optionally withhold tuition credit to wait until I'm in a higher tax bracket (after a full year's work)? I know that it applies from the lowest bracket up, but I have enough to actually break the second federal bracket.

Thanks muchly for any advice given!

Frank


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## MoneyGal (Apr 24, 2009)

1. Basic personal exemption works pretty much how you laid it out. 

2. Tuition credit is applied to tax owing BUT does not reduce your tax owing to below zero - it isn't a refundable tax credit, it just reduces any tax all the way down to zero (and then the excess amount of tuition credits are carried forward to a future year, and applied to that year's tax return). 

3. No. Tuition tax credits must be used to the greatest extent possible immediately. You can't postpone or defer using them.


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## domelight (Oct 12, 2012)

Franko said:


> Hi all,
> 
> Fairly new poster here with some burning tax questions. I posted another thread in investing and the response was tremendously helpful, so I thought I'd throw out a few questions here too
> 
> ...


Your math calculations are correct that you will use 43K of your tuition credits however a few points.

1. You have 60k in tuition not 120k. If you understand the T1 general you will see that the federal tax calculation and the provincial tax calculation are two seperate schedules in the calculation of which you can apply 60k in tuition too each.
It's a bit difficult to explain in this format but as simple as i can make 
a) determine your federal credits (ie basic personal amount plus tuition credits plus other credits such as age, children, disability)
b) determine the provincial credits (basically the same as the federal but with different rates)
--note these are non-refundable credits and determine a reduction in tax at a fixed percentage. 10,000 or 60,000 the % is the same.
c) determine federal tax owing. the amounts are indexed meaning the higher the $ amount the higher tax % you will pay.
d) determine provincial tax. (basically the same as "C" above but with different %'s again.

2. c+d-a-b = tax owing.

Again theres much more to it then this but this is as simple as I can make it. in three minutes.

3. So based on your scenario and assuming you had tax witheld from your 60K T4 income. It is reasonable to assume that you will realize a refund equal to the amount of tax deducted from your T4. Additionally you will likely have carryforward tuition amounts to use next year as well.

4. You can carryforward tuition indefinitely (the amounts never expire) and yes tuition is an elective claim so you may choose to use it whenever you like. now or twenty years from now.

5. However in point one above I explained that tuition is a non refundable credit which is applied at a fixed %. so whether your income is 50k or 500k it makes no difference the % is the same. So you may as well use it up now and get the use of the money. (too complicated to explain but there are circumstances where you may realize a slighlty better benefit by claiming the tuition in a higher tax bracket) but its not even close to worth waiting for. Just use up the credits as quickly as possible.


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## MoneyGal (Apr 24, 2009)

domelight said:


> 4. You can carryforward tuition indefinitely (the amounts never expire) and *yes tuition is an elective claim so you may choose to use it whenever you like*. now or twenty years from now.


Tuition credits are not elective; they must be used as soon as there is federal income tax payable. See http://www.cra-arc.gc.ca/tx/ndvdls/...tng/ddctns/lns300-350/323/crry-frwrd-eng.html

Specifically, CRA says (from the link) "Students can carry forward indefinitely and claim in a future year *the part of their tuition, education, and textbook amounts they cannot use* (and do not transfer) for the year."


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## Charlie (May 20, 2011)

MoneyGal is correct. From her link re carryforwards: "They have to claim their carry-forward amount in the first year that they have to pay federal tax."

And since these are credits, not deductions, it really doesn't make any sense not to claim them as soon as you can. They're worth the same whether your taxable income is in the bottom or top bracket.

EDIT: Domelight noted this too. I'm just repeating all y'all's good advice here....Mondays.


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## MoneyGal (Apr 24, 2009)

Domelight noted the opposite; that's why I commented!!


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## Charlie (May 20, 2011)

I was acknowledging he'd pointed out the value of the credits before I did. 

And I'd originally thought you might have been mistaken on the manditory claiming of carryforward credits (I thought you had to use up all those earned in the year per your quote, but could choose on when to claim those carried forward from a previous year) but I was wrong on that. Hence my post.

So I'm clearly having a very Monday day. Hoping for better as the week progresses. .


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## MoneyGal (Apr 24, 2009)

Forums are great for back-and-forth but written communication can fall far short of face to face. This is my only quibble with the suggestion from one poster that he get all his tax advice via e-mail: the potential for misunderstandings and confusion is high.


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## domelight (Oct 12, 2012)

MoneyGal said:


> Tuition credits are not elective; they must be used as soon as there is federal income tax payable. See http://www.cra-arc.gc.ca/tx/ndvdls/...tng/ddctns/lns300-350/323/crry-frwrd-eng.html
> 
> Specifically, CRA says (from the link) "Students can carry forward indefinitely and claim in a future year *the part of their tuition, education, and textbook amounts they cannot use* (and do not transfer) for the year."


MoneyGal,

Thank you for correcting me. I agree that you must use up the credits in the first year you owe federal tax.


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## andrewf (Mar 1, 2010)

Is there any sense in delaying using the credit? Isn't that strictly negative NPV?


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## MoneyGal (Apr 24, 2009)

There is no merit in delaying.


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## Franko (Mar 31, 2012)

Thanks for clarifying that everyone! Regarding my federal tuition credit - since the credit is a fixed percentage as mentioned, will I only be using up enough tuition credit to hit the $45k, 15% tax top end of the first bracket? So with the $10k personal amount, I'd essentially be using up 35k worth of federal tuition credit to completely exempt tax from the first 0-45k bracket. Am I interpreting this correctly?

@domelight: I paid about $12k in tax for 2012, so is it safe to assume that the tuition cred covers any tax owing and that I should get roughly a $12k refund back?

Another question if I may - If I know what my 2013 income will be roughly, can I start making RRSP contributions during 2013 in advance of the year-end calculation of RRSP room? I know that I have to wait until March (to avoid the contribution room being credited to 2012), but come March, am I able to start putting money into my RRSPs for 2013 in anticipation of earned income, or do I have to wait until Jan 2014 when the exact contribution room is known?

Again, many thanks for the advice!


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## kcowan (Jul 1, 2010)

When you claim the deduction on your taxes is not coupled with when you make the contributions. Deductions can be carried forward. Plus the 3 months of 2014 can be claimed in either year. Is that what you were asking?


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## Charlie (May 20, 2011)

Tax on $60K income is about $12K taking into account personal credits and the like. The combined fed/prov tuition credits are worth about 20%. So on your $60K taxable, you'll use up most of your tuition credits and get all, or most of the $12K back. ($60K credits x 20% tax reduction).

No need to wait to contribute to your 2013 RRSP.


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## Franko (Mar 31, 2012)

Charlie said:


> No need to wait to contribute to your 2013 RRSP.


So just to clarify, say I'm expecting my 2013 contribution room to total $15,000 after the year of work. Could I contribute $15,000 into RRSPs right away, without penalty, long before having actually "earned" that contribution room from working for the entire year? And also, what happens if I find out that I've over-contributed at year end?


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## Spudd (Oct 11, 2011)

To be on the safe side, you should wait to contribute huge amounts until you get your notice of assessment after filing your taxes. This will tell you your 2013 limit.


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## Charlie (May 20, 2011)

Remember that your 2013 contribution room is based on your 2012 income. Safest time to contribute is when you receive your notice of assessment, but you should be able to calculate your room as soon as you've figured out your 2012 income.


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## Franko (Mar 31, 2012)

Sorry, I think I mixed up my years in my above question so that might have been confusing - What I meant was - say I currently have 0 contribution room, but I know that by the end of 2013, I'll have worked up to X contribution room. Can I start investing now for that room that I'll have by the end of 2013? Or do I have to wait until 2014 to put anything into the RRSP?


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## Charlie (May 20, 2011)

the room you earn in 2013 won't kick in until 2014. So no. If you have no room based on your 2012 income, you need to wait to Jan 2014 to contribute.


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## Franko (Mar 31, 2012)

Charlie said:


> the room you earn in 2013 won't kick in until 2014. So no. If you have no room based on your 2012 income, you need to wait to Jan 2014 to contribute.


I see. Thanks for clarifying that!


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