Why do I owe taxes if I still have tuition credits left? Aka how tuition credits work

Time to read: 3 minutes

In your first few years after graduation, you’ll have tuition credits to help lower your taxes. Some people think if they have tuition credits left, they won’t owe any tax when they file their tax return. Others are shocked to find an amount owing - one they didn’t plan for - when they file their tax return. This post will help you plan for your first few tax returns, so there’s no surprises come April! 

How tuition credits work

When you pay tuition, you accumulate tuition credits when you file your tax  return for that year. For example, if you paid $20,000 in tuition this year, you’d accumulate $20,000 in tuition credits when you file your return. 

Tuition credits aren’t exactly real money – claiming $20,000 in tuition paid this year doesn’t mean you’d get a cheque for $20,000 in return – but they do have a big financial impact. 

Once you graduate from school and start earning money, you can essentially earn a dollar income tax free for every dollar of tuition credits you have. After 8 years of post-secondary education, most of our clients have accumulated more than $100,000 of tuition credits. If you graduate with $100,000 of tuition credits, you can essentially earn $100,000 without paying income tax on it. That’s a huge savings! 

So, if I have tuition credits left, why might I still owe taxes? 

First, a quick refresher on how taxes work for self-employed people. Unlike employees who have taxes withheld from their paycheques, most self-employed people don't pay taxes during the year so they have to pay it when they file their returns.

When you file your return, there are two types of taxes you’ll owe: income taxes and Canada Pension Plan (CPP). Most people think these are the same thing, simply “taxes they owe,” but they operate very differently. 

• Income taxes amount to between 20-55% of your income, depending on your income level and where you live.

• CPP contributions amount to about 11% of income, up to a max of about $6,000. These are required and can’t be opted out of.

Tuition credits can be used to offset (pay for) income taxes owing, but cannot be used to offset CPP contributions. This is why if you have tuition credits left, you can reduce or eliminate income taxes you owe, but you may still have an amount owing once your return is filed. That’s because of CPP! 

In the long-run, CPP might be beneficial. Although contributions are mandatory now, you’ll receive a benefit from the government when you retire. Think of it as a forced retirement fund!