Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Clarification of the integration between section 118.61 (unused tuition and education tax credits), section 118.81 (tuition and education tax credits transferred), section 118.92 (ordering of credits) and section 121 (dividend tax credit). When there are both dividend tax credits (cannot be carried forward) and unused tuition and education tax credits (can be carried forward), can the dividend tax credit be used to reduce tax payable to zero so that the unused tuition and education tax credits can be transferred to a student's parent or grandparent? If the tuition and education tax credits cannot be transferred to the student's parent or grandparent, can the dividend tax credit be used to reduce the student's tax payable to zero so that the student can carryforward the unused tuition and education tax credits.
Position TAKEN:
With respect to the computation of tuition and education tax credits transferred in section 118.81, the dividend tax credit cannot be used to reduce a student's tax payable to zero so that the student cannot transfer the tuition and education tax credits to a parent or grandparent.
With respect to the computation of unused tuition and education tax credits at the end of a taxation year in subsection 118.61(1), the dividend tax credit can be used to reduce a student's tax payable to zero so that the student can carryforward unused tuition and education tax credits. However, proposed amendments to subsections 118.61(1) and (2) were released by the Minister of Finance on November 30, 1999. If the amendments are enacted as proposed, for the 1999 and subsequent taxation years, in a situation such as the one described above, the taxpayer would not be able to use the dividend tax credit to reduce his or her taxes otherwise payable in order to take advantage of the unused tuition and education tax credits carryforward.
Reasons FOR POSITION TAKEN:
In the computation of variable B (the tax otherwise payable) in section 118.81, the dividend tax credit cannot be deducted.
See 9918415 as regards the unused tuition and education tax credits .
XXXXXXXXXX 2000-000574
M. Azzi
Attention: XXXXXXXXXX
April 20, 2000
Dear Sirs:
Re: Unused Tuition Tax Credits and Tuition Credits Transferred
This is in reply to your letter of January 15, 2000, regarding the interaction between sections 118.61 (unused tuition tax credits), 118.81 (tuition tax credits transferred to parent or grandparent), 118.92 (ordering of credits) and 121 (dividend tax credit) of the Income Tax Act (the "Act").
You have described a situation where an individual has taxable income in 1999 which includes dividends from taxable Canadian corporations and also has eligible tuition tax credits for the year. You indicate that the dividend tax credit would be sufficient to eliminate the individual's 1999 taxes otherwise payable, even if there were no tuition tax credits. You therefore ask if the individual can use the dividend tax credit to reduce her tax to zero and transfer the tuition tax credit to her parent. If the tuition tax credit cannot be transferred, you ask if the individual can carry it forward.
Current Law
Section 118.81 of the Act provides that the tuition and education tax credits transferred for a taxation year is the lesser of the amount determined by the formula (A-B) and the amount designated by the student to be transferred. Variable A in the formula in section 118.81 of the Act is the lesser of the current year tuition and education tax credits and $850. Variable B in the formula is the "amount that would be the person's tax payable under this Part for the year if no amount were deductible under this Division (other than an amount deductible under section 118, 118.3, 118.61 or 118.7)". In the computation of variable B (the tax otherwise payable) in section 118.81 of the Act, the dividend tax credit cannot be deducted. Therefore, in the scenario you described, pursuant to the calculation in section 118.81, the individual cannot use her dividend tax credit to reduce her taxes otherwise payable to zero in order to transfer her tuition tax credits to a parent or grandparent.
Pursuant to variable B of subsection 118.61(1) of the Act, the current year tuition tax credits are included in the computation of the "unused tuition and education tax credits" ("UTETC"). Pursuant to variable C of subsection 118.61(1) of the Act, the "lesser of the value of B and the amount that would be the individual's tax payable under this Part for the year if no amount were deductible under section 118.5 or 118.6" is subtracted from variable B in computing the UTETC (underlining for emphasis). Due to a dividend tax credit, the individual's tax payable, for purposes of variable C, would be "nil". Accordingly, in the scenario you described, the full tuition tax credit (variable B) would be eligible to be carried forward by the taxpayer. The ordering provision in section 118.92 of the Act does not override the computation of the UTETC in subsection 118.61(1) of the Act.
The same rationale applies to the deduction of the UTETC pursuant to subsection 118.61(2) of the Act. Paragraph 118.61(2)(b) of the Act requires a computation of the tax payable before the tuition tax credit, but after the dividend tax credit.
Proposed Amendments to Subsections 118.61(1) and (2) of the Act
As you know, proposed amendments to subsections 118.61(1) and (2) of the Act were released by the Minister of Finance on November 30, 1999. These proposed amendments, which will be effective for the 1999 and subsequent taxation years, will make the calculation of the student's UTETC compatible with the ordering provided in section 118.92 of the Act for the claiming of non-refundable credits. Accordingly, if the amendments are enacted as proposed, for the 1999 and subsequent taxation years, in a situation such as the one described above, the taxpayer would not be able to use the dividend tax credit to reduce his or her taxes otherwise payable in order to take advantage of the UTETC carryforward.
We trust that these comments will be of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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