I just finished paying the Canadian Revenue Agency $111.87. That is the amount I owed them after my mini audit; it was due to improper filing of some student loan interest. I realize now the mistake that was made while filing my taxes; the loan interest that I was using as a tax right off was not registered with the Canadian Student Loans service. That is fair enough, but as I dug a little bit deeper the Canadian tax system left me angered once again.

If you follow this blog enough (currently there are non of you), you will certainly come to know that I come from a single parent home. At the time of my starting university -2000- there was not a great deal of income. My mother had recently accepted a position with Transport Canada and had taken a significant pay cut. Affording the mortgage payments and food was difficult enough, so there wasn’t any extra income to pay for my tuition. I was lucky enough to have wonderful grand-parents who had helped by donating some funds to the cause. Regardless there was still a short fall that I was required to fill through loans and gainful employment.

When I spoke with the OSAP office I soon realized that the household’s meager income was enough to preclude me from obtaining a government loan. I managed my first year with the funds from my grand-parents and was lucky enough to get a very good summer job. Even with that extra income -and my perhaps my childish spending habits- it became apparent that I was going to require some sort of a loan to afford books and tuition for the winter semester. I knew full well that I was not going to get an OSAP loan so I proceeded to the Royal Bank to request a loan with them. I was applied with my mother as a co-signer and was quite surprised when I was declined. I found out that it was due to the fact that my $6,000 student line of credit application would push the household’s threshold above the 40% barrier allowed by the bank -see previous challenge of food and mortgage. The situation was ideal; the family income was too high to be granted OSAP but too low to receive a bank loan, talk about being stuck in no-man’s land. Through a little bit of finagling, and marking my summer income as something that could be considered solid employment, the bank managed to get me the $6,000 line of credit without a co-signer.

Throughout school I carried anywhere from $2,000-6,000 on the line of credit the whole time. The interest payments weren’t that bad since I was getting prime+1%. Over the 3-4 years I had the loan I payed roughly in the neighbourhood of $500 interest. When I finished school I closed the line of credit and opened one for non-students (which was required). While working at March Networks I was making enough that I was looking at paying significant amounts of tax. It was at this point that I used the interest of the student loan interest as a tax credit (17%). So I got about $100 back on the roughly $500 I paid in interest.

When I filed my tax return I had a few other deductions including some used tuition. Shortly after filing I received a letter that I was having my return reviewed and it may take an additional six weeks to have it returned to me, as well I would have to send them my tuition receipts. I sent the tuition receipts promptly as I was looking at a roughly $3000 tax return. After six weeks of hearing nothing I phoned them to find out that my return had been lost in the shuffle and that it would be another 6 weeks to receive my return. It was at this point that I started checking at which point they would be starting to pay me interest. Well it turns out that I would fall just short of the period when their refund was unaccetably late and I would not receive any interest. I really didn’t have any choice but to begrudgingly accept.

Well a month ago I received a letter saying that they (CRA) wanted proof that my loan was registered with the Canadian Student Loan Association -or some such. I was quite sure that since I had to provide RBC with proof of my student status it must be registered as a student loan. When I called RBC they informed me that the loan was not a Canadian Student blahblahblah… Regardless they provided me a letter that confirmed that it was a student only loan and that the loan was closed immediately after the termination of my student status.

I sent the letter knowing full well that CRA was going to discard it and charge me additional tax. Last week I received a letter confirming that my interest was not a tax credit applicable and that I would owe $108 plus $3.87 of interest. Apparently when I make an error I owe interest all the way back to the day that I received my funds, yet when they make an error they owe me no interest.

What all this tells you is that only way to receive the student loan interest tax credit is to receive your loan through the the government themselves. This seems a little fishy. What is even more unnerving is the interest rate being charged on OSAP loans; it is in fact prime + 2.5% if you will risk a floating interest rate, and prime + 5% if you want to lock in your interest rate. The prime + 5% rate would currently be in the range of 11-11.5%, and a comparable bank loan would be 8% -hell even my Visa is giving me a discounted and permanent 10%. The floating rate is a more reasonable prime + 2.5% which I will point out is higher than my RBC student line of credit which was prime + 1%. Now this is a bit misleading since OSAP does give you the benefit of not paying interest while you are in school. But when you figure that most students take a minimum of 10 years paying off student loans I would wager that 14 years of paying 7% is better than 10 years of paying 8.5%. Now it may turn to your favour when your factor in the 17% tax credit but this doesn’t offset the fact that it is not available to all students.

The fact remains that the government is only giving a tax break on student loan only if you are willing to pay their interest rates which are higher than any Canadian bank would give you. Thank you CRA for making things easy as possible for middle class to receive a post-secondary education.

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