Canada’s education tax breaks are flunking

Posted on November 19, 2013 in Education Policy Context – Report on Business/Economy/Economy Lab
Nov. 18 2013.   Christine Neill

Canada’s hodgepodge of federal and provincial tuition and education tax credits for postsecondary students are expensive, not well understood, loosely targeted, and in desperate need of change.

Federal tuition and education/textbook tax credits are the most costly postsecondary student aid program in Canada. They cost the federal government about $1.6-billion in 2012; meanwhile the Canada Student Loan Program cost less than $1-billion. The tax credits – when combined with their provincial counterparts – cut the cost of postsecondary education by just over $2,000 a year for the average Canadian university student, and a bit less for college students.

The tax credits are non-refundable, meaning you need sufficient taxable income against which to claim them. So students from low-income families benefit least from them, while students from relatively well-off families benefit more. But these credits often do not go to the students themselves. Some students pass along these credits to their parents. Others carry them forward until post-graduation employment.

Tax credits are vote getters. They are also administratively simple. But lessons from economics, including behavioural economics, show us that these tax credits are unlikely to affect youths’ decisions to undertake more study, or to help reduce the financial burden of study for those who need it the most.

Another major shortcoming is that potential postsecondary students do not know about the tax credits, especially in advance of applying.

The tax credits are not mentioned on the national financial aid website (CanLearn) that gives students estimates of the cost of postsecondary education. Nor are they mentioned on most provincial student aid websites (Ontario is a commendable exception), or in tuition fee or financial aid documentation. The credits really only pop up on year-end tax forms, buried along with a bunch of other tax credits. So many students do not know the credits exist, let alone how much they might save.

Good policy must time payments right – people do not change their behaviour as much for future benefits as they do for immediate gains. And support must be targeted. If the goal is to get more kids studying in our colleges and universities, then we should target aid to those whose choices are most amenable. Canadian research suggests that – unsurprisingly – kids from richer families do not change their education choices because of a couple of thousand dollars a year in aid, but kids from poorer families do. So if the intent of the policy is to boost the education level of Canadians, it makes sense to give more to kids from low-income families – the opposite of what the tax credits currently do.

One simple change would be to make the tax credits refundable. This would allow individuals to claim them regardless of earned income. And this would make the credits more efficient and equitable, since it would allow all students, not just those whose parents earn enough to have a tax liability, to claim them sooner rather than later.

It’s easy to improve the billions we spend on postsecondary tax credits each year. Making them refundable is a simple, low-cost change that would improve fairness and economic efficiency, and that would garner broad political support.

Christine Neill is associate professor of economics at Wilfrid Laurier University. Her commentary, “What You Don’t Know Can’t Help You: Lessons of Behavioural Economics for Tax-Based Student Aid,” can be found

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