Is income used to pay back student loans taxable in Canada?

April 15, 2007 6:53 AM

Canadian tax question: After six years of university (undergrad and an M.Phil), I am about to start working. Will I need to pay taxes on income that I use immediately to pay off student loans?

Leaving the hallowed halls of academia, I have some tax questions. My studies in the last few years have been partly funded by student loans from the federal government and province of British Columbia. As soon as I am no longer a full-time student, they begin accruing interest. I want to pay them off as quickly as possible.

The first question, then, is about income tax. If I am shipping money straight from my paycheque into the coffers of the federal and provincial student loan bodies, does it count as taxable income? If not, I would probably be able to push myself into a rather low tax bracket by spending as much income as possible on paying down my debt burden.

Secondly, I have been spending a lot on tuition in the past few years. Can I use that as a deduction against future taxes. If so, how would I go about doing it?

In case it matters, I will probably be working for the federal government in Ottawa, Ontario. Many thanks for your suggestions.

posted by sindark to work & money (11 comments total)

Yes it counts as income.

You can use deductions from tuition as tax credits. You probably will get back a bunch of what you pay in tax for at least a year or two, depending on how much you make.
posted by chunking express at 7:03 AM on April 15, 2007

Well, I would first talk to a tax accountant, but one thing is clear: you do not get any deductions for reimbursing the principal on your students loans. At best, you get a deduction for interest paid on that loan (that's true in Quebec, but not necessarily in BC). Since student loans usually carry a low interest rate, paying them off quickly is probably not the best strategy. If you have some disposable income, better use it to buy RRSPs, which do give a fairly good tax break.
posted by bluefrog at 7:08 AM on April 15, 2007

You pay tax on all earned income, regardless of what you choose to spend it on.
posted by girlpublisher at 7:45 AM on April 15, 2007

You pay tax on all earned income, regardless of what you choose to spend it on.

This is a little simplistic given RRSPs, RESPs and HCEAs.
posted by jacquilynne at 7:54 AM on April 15, 2007

You can claim the interest you pay on student loans in your deductions. Your loan institution will send you a summary of your payments each year, and they usually give you a helpful line with the total interest.

To quote from the letter in front of me (yay tax time):

The Government of Canada provides an Income Tax credit for the interest paid on government sponsored student loans. This receipt shows the interest you have paid on your student loans held at the [institution] during the 2006 taxation year. Please enter the amount below on your Income Tax Return.

Payments applied to loan principal and payments made by the government on your behalf (e.g. Interest Relief) do not qualify for an Income Tax credit.

posted by lowlife at 8:32 AM on April 15, 2007

Well, I would first talk to a tax accountant

What you really need to do is file your own taxes! You will learn very quickly, and the tax forms are very simple and straight forward. In a few years, when you have investment expenses and capital gains and stuff, then you might want some outside help.

Start with the tax forms, look up each line you don't understand in the tax guide, and you will be on your way. (root link at Revenue Canada).

If you haven't done any previous years taxes, you will want to do that. Call revenue Canada's tax help line to see how far back you have to go, but most likely you will have to start from the first time you ever had employment income, or had any education expenses that you want to carry forward.
posted by Chuckles at 9:48 AM on April 15, 2007

IANAA. However, you do have to pay taxes on your income. If you have unused tuition credits, you can write that off. You can also write off some interest on approved student loans.

Check the interest rate you will be paying. You might want to check with your bank to see what rate they would give you on a loan. If the bank loan would be lower, even after you deduct the interest write-off on a student loan, you might want to cinsider a bank loan. (For example, student loans was offering me 9% when I had 6% on my line of credit. I wasn't in a high enough tax bracket to write 9% down to 6%, so I just used my line of credit to pay off the loan, since it was small and I wasn't going to need any of the deferral or other perks.)
posted by acoutu at 10:36 AM on April 15, 2007

It isn't just tuition, you can also claim the education amount (from page 40 of the tax guide):

Education amount

You can claim this amount for each whole or part month in 2006 in which you were enrolled in a qualifying program. If you were under 16 at the end of the year, you can claim this amount only for courses you took at the post-secondary level.
...
If you were enrolled full-time, you can claim $400 per month.

so I just used my line of credit to pay off the loan

Technically, I agree with you - comparing the effective (after tax) interest rates, and do what's cheaper - but..

Student loans are very flexible for the borrower. If you go back to school, you don't have to make payments, and if you lose your income, your payments can be differed for months at a time. Unless you are very sure you will not need those features, it probably makes sense to pay a small rate penalty, and keep the student loans.

Also, the effective rate on non-student loans (like your line of credit) is cheaper right now, only because of the current regime of low interest rates. The student loan rate is calculated as a fixed percentage penalty above prime. As prime goes up, the penalty becomes less significant, but the tax deduction grows along with the total interest rate. So, if interest rates go up a percent or two, the effective student loan rate will become competitive. Obviously that isn't going to happen in the next year or two, but you have to look out ten years or more to know for sure.
posted by Chuckles at 11:16 AM on April 15, 2007

Absolutely. That's why I noted I had a small loan and wasn't going to need the deferral option.
posted by acoutu at 12:53 PM on April 15, 2007

you can claim payments on govt loans against tax, but you can't claim payments made on student loans from an institution like a bank (yup, that sucks!)..

hopefully you've been filing tax returns each year while at uni so you can claim your tuition each year against income (you can carry it over to future years if you don't need it that year).

seconding the use of ufile.ca -- its dead easy.
posted by modernnomad at 3:53 PM on April 15, 2007 [1 favorite]

>Well, I would first talk to a tax accountant

>>What you really need to do is file your own taxes!

Both have their merits. But I will say that I have found in the past that an accountant (who was also a friend) was able to save me thousands of dollars in tax (in Australia) that I'd never have known how to sort out by myself. Accountants can be a very good thing, depending on your situation.
posted by stavrosthewonderchicken at 10:53 PM on April 15, 2007