Denied tax credit for interest on student loans

By Doug Carroll | September 19 2013 08:01PM

At issue

As many a parent will attest, it can be very costly to put a child through post-secondary schooling. If the family does not have immediate resources available, it is common to consider borrowing to finance the need.
Fortunately, the tax system provides support to qualified loans through a non-refundable tax credit based on the amount of interest paid in the course of retiring such loans. To qualify, section 118.62 of the Income Tax Act (ITA) requires that the loan must be made “under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level.”

Unfortunately, it’s almost an annual ritual that a case is reported where a past student is denied entitlement to the tax credit because the particular loan does not meet this criterion.

Mueller v. R., 2013 TCC 3

Two sisters were unable to obtain student loans under the federal government’s student loan programs, as their parents’ income was too high. Instead, they secured loans from a bank under its “Student Line of Credit” program, promoted by the bank as being at rates lower than under the student loan program.

On filing their tax returns in the year following graduation, their interest claims related to loan retirement were denied.

The sisters’ mother represented them in their appeals, and testified that a bank employee had represented that the loans were tax deductible. No reference to this effect appears in the promotional literature, and no one from the bank was called to testify.

It was acknowledged that the loans were not of the listed types in ITA 118.62, which the judge found was “fatal to their claim.” Appeals denied.

Sandhu v. R., 2010 TCC 223

The taxpayer was represented by his father in this appeal from a denied tax credit claim based on repayment of a loan to a bank.

The father provided a letter from a bank representative dated a week prior to the hearing. It read in part: “Due to my busy schedule, I will not be able to appear personally on April 7, 2010. The student loan to Gurdarshan Sandhu was made under the Canada Student Loan program.”

The judge allowed no evidential weight to the letter as no details of the loan were provided. Indeed, there was no way to be certain whether the referenced loan was even the loan at issue in court. The judge went so far as to speculate whether the writer may have been confusing student loans with some internal lending program the bank makes available for professional graduate programs. Appeal denied.

2001-0074215E Refinancing-Student Loans

A taxpayer proposed to obtain a mortgage against his residence to reduce the interest rate on his existing qualified student loan. The Canada Revenue Agency (CRA) stated that interest on the new loan would not qualify for claiming the tax credit under ITA 118.62.

2010-0376461I7E Credit for Interest on Student Loan

The CRA was asked its opinion on whether interest paid on a student loan assigned to a collections agency would still qualify for the tax credit claim. The writer opined that the likelihood is that being under a collections process alone would not be sufficient to lose the tax credit claim, but that a court judgment would definitely extinguish it.

Practice points

  • A ‘loan to a student’ is not necessarily a “student loan” for the purpose of claiming the tax credit on the interest. To qualify, the loan must be arranged under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a corresponding law of a province.
  • If challenging a denial of interest, make sure the facts are satisfied (so you don’t waste your time), and that you have the original documentary evidence to prove it. Second and third degree-removed hearsay assertions will not suffice.
  • A debtor should carefully consider the lost tax credit on qualifying student loans before including those debts in a refinancing or consolidation, even if on the face of it the new interest rate appears lower.
  • A person facing collections action should understand the importance of keeping up payments on student loans in order to preserve the tax credit entitlement, as this will be lost if a judgment is entered.