16 January 2003 External T.I. 2002-0157475 - TUITION T1 SHCEDULE II

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Is the calculation of the current year's claim for the tuition and education amount on Schedule 11 incorrect?

Position: No.

Reasons:

Because the ordering provisions of section 118.92 must be applied, the amount of the tuition and education credits claimed and carried-forward are determined before claiming certain tax credits that may be available.

XXXXXXXXXX 			2002-015747
G. Kauppinen
January 16, 2003

Dear XXXXXXXXXX:

Re: Tuition and Education Tax Credits

We are writing in reply to your letter dated April 4, 2002, which was forwarded to us by the Summerside Tax Centre, regarding the computation of your claim for unused tuition and education tax credits carried forward and the claim for current year tuition and education tax credits for the taxation year 2001.

Specifically, you question line 12 of Schedule 11 which instructs the taxpayer to "enter the amount from line 5 or line 11, whichever is less". You argue that this compels you to claim more than is necessary to eliminate your federal income tax liability for 2001.

Our Comments

Subsection 118.92 of the Income Tax Act (the "Act") provides that in computing an individual's federal tax, certain tax credits must be claimed in a certain order. The details of the ordering, and a description of the tax credits affected, can be found in paragraph 4 of Interpretation Bulletin IT-523 entitled Ordering of Provisions Applicable in Computing an Individual's Taxable Income and Tax Payable ("IT-523").

The law has changed slightly since IT-523 was issued on August 25, 1989. To bring paragraph 4 of IT-523 up to date the following inserts should be made:

? Between paragraphs 4(e) and 4(f) should be inserted - "the tax credit for unused tuition and education tax credits (section 118.61)"

? Between paragraphs 4(k) and 4(l) should be inserted - "the tax credit for interest on student loans (section 118.62)"

Unused tuition and education tax credits are dealt with in section 118.61 of the Act. Subsection 118.61(2) of the Act states that:

For the purpose of computing an individual's tax payable under this Part for a taxation year, there may be deducted the lesser of

(a) the individual's unused tuition and education tax credits at the end of the preceding taxation year, and

(b) the amount that would be the individual's tax payable under this Part for the year if no amount were deductible under any of sections 118.1,118.2, 118.5, 118.6, 118.62, 118.8, 118.9 and 121.

Consequently, in calculating the claim for unused tuition and education credits, taxes payable should be calculated assuming no amount is deductible under any of the following:

118.1 - charitable gifts
118.2 - medical expense credit
118.5 - tuition credit (current year)
118.6 - education credit (current year)
118.62 - credit for interest on student loan
118.8 - transfer of unused tuition and education credits to spouse or common-law
partner
118.9 - transfer of unused tuition and education credits to parent or grandparent
121 - dividend tax credit

As stated above, the claim for unused (i.e., prior year's) tuition and education amounts is limited to the lesser of the balance available at the end of the prior year and the tax as calculated above. Where the claim is limited to the tax as calculated above, the balance of the unused (i.e. prior year's) tuition and education amounts and any current year tuition and education amounts will be carried forward to future taxation years. The fact that an individual may be entitled to credits under sections 118.1, 118.2, 118.5, 118.6, 118.62, 118.8, 118.9 or 121 of the Act is irrelevant. The instructions for line 8 of Schedule 11 reflect these requirements. The unused tuition and education tax credits still get ground down even though some of these credits may be lost to the individual.

For purposes of the current year education and tuition tax credits, taxable income must first be reduced by all personal and age amounts (subsections 118(1) and 118(2) - lines 300, 301, 303, 305, 306 and 315), E.I. and C.P.P. amounts (subsections 118.7 - lines 308, 310 and 312), the pension income amount (subsection 118(3) - line 315), mental and physical impairment amounts (section 118.3 - lines 316 and 318) and unused tuition and education amounts. Technically, the current year's tuition credit (section 118.5) must be claimed before the current year's education amount (section 118.6) although they are both shown together on line 323 of Schedule 1.

Under the general tax policy described above, it is clear that an individual may be forced to claim his or her unused tuition and education tax credits at the expense of losing other allowable tax credits. Should you wish to pursue the basis for this policy, we suggest that you contact the Tax Policy Branch of the Department of Finance, who are responsible for general tax policy, by writing to L'Esplanade Laurier, 140 O'Connor Street, Ottawa ON K1A 0G5.

The Interpretation Bulletin referred to herein is available from your local tax services office or it can be accessed on the Canada Customs and Revenue Agency's website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

c..c.: Wendy Evans
Summerside Tax Centre