Tuition credits lost due to dividend gross up

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Phil D
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Tuition credits lost due to dividend gross up

Post by Phil D »

After many years of being educated my daughter has accumulated lots of unused tuition credits. This year she also has some non registered investments which create a small amount of dividend income.

Just as the dividend gross up has a negative impact on OAS clawback, it also seems to result in the loss of tuition credits. As far as I can tell, Schedule 11 requires the filer to claim unused tuition credits sufficient to offset any federal tax payable to zero. However, the dividend tax credit is applied after federal tax has been reduced to zero and so has no value. Effectively this means that tuition credits are being used up to offset dividend gross up rather than actual income.

This is probably a fairly rare situation and I can find no reference to it when I search online. Has anyone come up against this or a similar situation and any suggestions how to avoid the waste of credits ?
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Re: Tuition credits lost due to dividend gross up

Post by epson600 »

It happened to me one year for the same reason. The NOA stated that they reduced my dividend tax credit to zero. Since it only happened the year when I had a whole whack of tuition credits to apply and next year I wouldn't have enough credits to get taxes owing to zero; I just let it go.

Hope the treasury board made good use of my extra $30. 8)
Davis
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Re: Tuition credits lost due to dividend gross up

Post by Davis »

Yes, you're not the only one to encounter this. This is a glitch in the tax system, but you're right that it effects few people, so it doesn't get much attention. The impact on OAS is a bigger issue that the government hasn't addressed.
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ghariton
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Re: Tuition credits lost due to dividend gross up

Post by ghariton »

I don't think it's a bug, but rather a feature.

Happened to me, or rather to my daughter. I paid for her university via dividends from my corporation, and found that most of the dividend tax credit was wiped out. That was a significant amount of money. On the other hand, the dividends were taxable in her hands, i.e. at a rate very close to zero, so I had no real complaint.

I believe that adrian2 had a similar experience.

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adrian2
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Re: Tuition credits lost due to dividend gross up

Post by adrian2 »

ghariton wrote: 28 Apr 2017 21:41 I believe that adrian2 had a similar experience.
I've actually learned from your experience, therefore my children were paid salary, not dividends.
Last edited by adrian2 on 28 Apr 2017 22:09, edited 1 time in total.
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adrian2
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Re: Tuition credits lost due to dividend gross up

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Phil D wrote: 28 Apr 2017 04:39 Has anyone come up against this or a similar situation and any suggestions how to avoid the waste of credits ?
Rearrange your daughter's affairs so there's minimal to no dividends earned by her until her tuition credits are used up.

If she has RRSP room, suggest that she contributes in kind her dividend earners and defer taking the RRSP deduction.
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Phil D
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Re: Tuition credits lost due to dividend gross up

Post by Phil D »

Thanks, folks. At least it is slightly comforting to know that we didn't miss a way to have avoided this for 2016. And yes, we are already looking at how to move dividend income into registered portfolios.
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