Cross-Border Tuition and Education Credits: Canada-US

Tuition paid at a school in one country can generate a tax benefit in the other country, but the two systems handle education costs differently. Canada offers a non-refundable tuition tax credit for qualifying tuition paid to institutions in both Canada and the US (and other countries). The US offers the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC) for tuition paid to eligible institutions, but only US institutions and certain foreign institutions that participate in US federal student aid programs. A Canadian student at a US university can claim the Canadian tuition credit for the US tuition. A US student at a Canadian university may or may not qualify for the US education credits, depending on whether the Canadian school participates in US federal student aid. The cross-border mismatch is that Canada is more generous with foreign tuition than the US is.

How does the Canadian tuition credit work for US tuition?

The Canadian tuition tax credit under ITA 118.5 allows a credit for tuition paid to a qualifying institution outside Canada if the student was enrolled in a course of study lasting at least 13 consecutive weeks and leading to a degree. The institution must be a “university outside Canada” within the meaning of the Act. The CRA maintains a list of designated educational institutions, and most accredited US universities qualify.

The mechanics:

• Eligible tuition. Tuition fees paid for courses at the post-secondary level. Mandatory ancillary fees may qualify, but room, board, transportation, and optional fees do not.
• Credit rate. 15% at the federal level. Each province has its own rate (Ontario is 5.05%, for example).
• Minimum. Tuition must exceed $100 for the year.
• Currency. Convert US tuition to CAD using the Bank of Canada exchange rate for the date of payment (or the annual average). The currency conversion rules apply.
• Carry forward. Unused tuition credits carry forward indefinitely. They cannot be carried back.
• Transfer. Up to $5,000 of unused tuition can be transferred to a spouse, parent, or grandparent.
• Form. Report on Schedule 11 of the T1 return. The student needs a Form TL11A (Tuition and Enrolment Certificate, University Outside Canada) from the institution, or equivalent documentation.

A Canadian student studying at a US university full-time for four years claims the tuition credit each year on their Canadian return. If they have no Canadian income (or low income), the credits carry forward and are used when they return to Canada and start earning, or are transferred to a parent.

How do the US education credits work for Canadian tuition?

The US provides two education credits under IRC 25A:

1. American Opportunity Credit (AOC). Up to $2,500 per student per year, for the first four years of post-secondary education. The credit is 100% of the first $2,000 of qualified tuition and fees, plus 25% of the next $2,000. Forty percent of the credit (up to $1,000) is refundable. Income phase-out: begins at $80,000 ($160,000 married filing jointly) of modified AGI.

2. Lifetime Learning Credit (LLC). Up to $2,000 per return (not per student), for any post-secondary education. The credit is 20% of the first $10,000 of qualified tuition. Non-refundable. Income phase-out: begins at $80,000 ($160,000 MFJ).

The catch for cross-border students: both credits require attendance at an “eligible educational institution,” defined as an institution eligible to participate in US Department of Education student aid programs. Many Canadian universities do not participate. The IRS states that a foreign institution must be eligible to participate in a student aid program administered by the US Department of Education to qualify. Schools that have signed a Program Participation Agreement (PPA) with the Department of Education qualify. Canadian universities with large US student populations (McGill, UBC, UofT) generally do participate, but smaller schools may not.

If the Canadian school does not participate, the US citizen studying there has no US education credit available for the tuition paid. The tuition is still deductible on the Canadian return through the tuition credit, but the US return gets no benefit.

What about 529 plans and RESPs?

529 plans. A US 529 plan allows tax-free growth and tax-free withdrawals for qualified education expenses at eligible institutions. Most accredited US and many foreign institutions qualify for 529 withdrawals. A Canadian university that is eligible for US student aid generally qualifies, meaning 529 funds can be used for Canadian tuition without triggering the 10% penalty on earnings. However, the 529 plan is not recognized by Canada: if the account holder moves to Canada, the plan becomes a foreign trust for Canadian purposes, with potential reporting obligations.

RESPs. A Canadian Registered Education Savings Plan allows tax-deferred growth and government grants (the Canada Education Savings Grant, up to 20% of contributions). RESP withdrawals for post-secondary education (Educational Assistance Payments) are taxed as income to the student. RESP funds can be used for education at qualifying institutions outside Canada, including US universities, if the student is enrolled full-time in a qualifying program of at least 13 consecutive weeks. The RESP is not recognized by the US: if the beneficiary or subscriber is a US person, the RESP is a foreign trust, potentially requiring Form 3520 and Form 3520-A.

What if I move mid-degree?

Students who start a degree in one country and move to the other face transition issues:

• Canadian student who moves to the US mid-degree. Tuition credits earned in Canada carry forward. Once the student becomes a US resident, they claim US education credits on their US return for tuition paid after the move. The carried-forward Canadian credits remain available for any future Canadian return where the student has Canadian income.
• US student who moves to Canada mid-degree. US education credits cannot be claimed on a Canadian return. The student claims the Canadian tuition credit for tuition paid to qualifying institutions (which may include their former US school if they continue studying there). Any unused AOC or LLC from prior US returns cannot be carried forward to a Canadian return.

For a student who is a US citizen throughout (studying in Canada), both systems apply simultaneously: the Canadian tuition credit for Canadian tuition (always available), and the US education credits for the same tuition (only if the Canadian school is an eligible institution).

What about student loan interest?

Canada. ITA 118.62 allows a non-refundable credit for interest paid on qualifying student loans (Canada Student Loans, provincial student loans). Interest on private loans, bank lines of credit, or US student loans does not qualify for the Canadian credit.

US. IRC 221 allows an above-the-line deduction (up to $2,500) for interest paid on qualified education loans. US federal and private student loans qualify. Canadian student loans may qualify if they meet the definition (used for qualified education expenses at an eligible institution). Income phase-out applies.

The mismatch: a Canadian with US student loan debt (from attending a US school) cannot claim the Canadian student loan interest credit on the US loan. A US person with Canadian student loan debt may be able to claim the US student loan interest deduction if the Canadian loan meets the IRC 221 definition.

What should I do next?

If you are paying tuition in one country and filing a return in the other, check two things: (1) whether the institution qualifies for the credit or benefit in the filing country, and (2) how to convert the tuition amount to the right currency for the return. If you have both a 529 and an RESP, the interaction between the two plans and the two tax systems needs to be mapped before withdrawals are made.

• 529 plan and moving to Canada, the US plan in a Canadian tax environment
• RESP and CCB when moving to the US, the Canadian plan in a US tax environment
• Currency conversion and exchange rates, converting tuition payments for tax reporting
• Canada vs US tax rates, the broader rate comparison
• Moving to the US from Canada: tax checklist, the full move checklist including education plan transitions

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.