Wednesday, 8 April 2009

Optimizing Tuition/Education Tax Credit Transfers: TaxChopper Wins Again

It's time to throw another test at the web tax software contenders. The challenge this time: transfer of Tuition and Education amounts. I refer to the calculation of the "just-enough" amount of tuition and education tax credits (see CRA IT-516R2 or simpler explanation here) to transfer from a student to another eligible person like a spouse or parent. If a student has no or low taxes to pay, which is often the case, the education credits can be transferred to reduce or eliminate taxes of the other person. But you want to transfer and claim only as much as needed to eliminate taxes since the students can carry unused amounts forward to future years to reduce their own taxes when they start earning.

Scenario: this scenario was constructed so that the various programs would completely eliminate taxes of the parent but the optimal amount to transfer is less than the full amount of credits.

Student: $0 income, Tuition $3000, 6 months full-time study = 6x$400 = $2400 giving $5400 in total credits but $5000 is the max in credits that can be transferred (with the equivalent indexed provincial amount being $6003).

Parent: $18,500 income (T4 box 14), $742.50 CPP paid (T4 box 16), $320 EI paid (T4 box 18), $3000 tax paid (T4 box 22), $2300 LSIF purchase (LSIF box 4). Low income and an LSIF tax credit will ensure that less than $5000 is the optimal transfer.

Packages: only the top 5 in my first ratings review are included - UFile & H&R Block (not tested separately since H&R Block is a re-branded clone of UFile), TaxChopper, WebTax4U and QuickTax

WebTax4U and QuickTax have no optimization routine built in the program itself. They require you to enter the transferred amount manually. You are on your own plugging in numbers by trial and error until the right amount to reduce the parent's tax to zero is found. When the maximum transferable of $5000 federally and $6003 provincially (Ontario) is entered manually neither program rejects the excessive amount so the credits would be wasted.

WebTax4U allowed a transfer of more than the maximum permissible and available (I entered $6500) though it restricted the federal amount claimed to $5000 (I tried entering $5400). Not very impressive error prevention. QuickTax at least signals an error and prevents it being saved.

TaxChopper and UFile both have an optimization routine where you click a box to have the program find the best amount to transfer. Only TaxChopper figures it out correctly as $4518.50 federal claim on line 324 of Schedule 1 and $2582.95 provincially on line 5860 of ON428. UFile gets the same amount for the provincial claim but evidently screws up the federal claim and enters $5000, evidently because it miscalculates the LSIF tax credit as only $272.77 (line 414). Both QuickTax and WebTax4U get the same $345 LSIF credit as TaxChopper.

All the programs calculate the same maximum refund of $3000 - all of the tax paid - for the parent but saying that means they all give an equally good result for the family ignores future tax that will have to be paid because those tuition and education credits are no longer available.


Joanne said...

I want to thank DIY for bringing this case to our attention.

I feel we need to clarify a couple of things. Firstly, UFile did not incorrectly calculate the LSIF, it used only as much as was needed to reduce the tax to zero.

The LSIF is a credit that must be taken in the year or lost. The tuition and education amount (which is actually higher than reported in your blog due to textbooks) can be used or carried forward by the student. In your case, the choice to take the LSIF makes more sense as a small portion is lost. However, the tuition is was not lost. It was used by the parent to drop the tax to $0.00.
Joanne Birtch
VP Marketing

CanadianInvestor said...

Joanne, I don't understand your comment. If the LSIF credit must be used or lost should the maximum credit of $345 not be used in priority to tuition credits in the year? Are you saying the other tax packages have incorrectly calculated the max credit? Why take any more than required of the tuition credit?

Joanne said...

My point is that the UFile does not incorrectly calculate the LSIF. The optimization routine takes the tuition first and reduces the LSIF claimed to deliberately bring tax to zero and not beyond.

As I wrote, "In your case, the choice to take the LSIF makes more sense as a small portion is lost."

Again, we am glad to know of this case, which though rare, shows there is always opportunity for improvement.

CanadianInvestor said...

Ok Joanne, thanks for clarifying.

HLMP said...

Thanks for an interesting and helpful blog!

I'm currently using UFile and was wondering if you have a suggestion to ensure that the correct tuition transfer is made? Should I opt not to "let MaxBack decide" and try out a few scenarios of my own?

Thanks again.

CanadianInvestor said...

HLMP, you could turn off the Let MaxBack Decide and try out amounts of tuition transfer till your taxes got to zero. The problem has arisen because there is also an LSIF. If there isn't one, then UFile should calculate the optimal / lowest tuition transfer amount.

Beyond the specific scenario I tested, there may be other situations with credits where the order of application makes a difference to get the lowest tax with most efficient use of various credits.

If Joanne of UFile is still reading these comments, maybe she would have a suggestion? Or you could contact UFile help.

Term Papers said...

Nice post. I really liked it.. Don't forget to update it regularly. I am looking for new updates dying to read more stuff from you.

CanadianInvestor said...

Termpapers, rest assured that I intend to review the web-based tax programs again in 2010.

Julie - mortgage rates canada said...

Tax Chopper is better than I would have thought it is then. That's very interesting and useful. Thanks for that.

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