1 December 2004 External T.I. 2004-0095101E5 - Employee Dependant Scholarship Program

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: The taxable status of an employee dependant scholarship program.

Position: Included in income of the employee under paragraph 6(1)(a).

Reasons: Paragraph 6(1)(a) of the Act is a provision of broad import and will include in a taxpayer's employment income the value of a benefit that was directly received or enjoyed by another person because of the taxpayer's office or employment, including employer-provided scholarships to dependants of employees. On an administrative basis the CRA will accept that certain employer-provided scholarships to dependants of employees can instead be included in the income of the dependant under paragraph 56(1)(n) of the Act. For paragraph 56(1)(n) of the Act to apply to the dependant's scholarship, there must be objective selection criteria that focus on the accomplishments of the dependant, for example, scholastic achievement. In this regard, the employer's selection criteria for scholastic achievement must be higher than the minimum entrance requirements for most post-secondary institution; otherwise, any dependant who enters a post-secondary education program would qualify for a scholarship. Further, there must actually be a limited number of scholarships provided by the employer, such that the number of dependants chosen from those who are otherwise eligible should be low enough that most employees could not expect their dependants to be selected. Collectively, these criteria will ensure that the merit of the dependant is prevalent in the employer's selection rather than the employee's relationship with the employer. In terms of a situation where the employment relationship is severed, for example, where a scholarship is awarded to the dependant of a retired or deceased employee, paragraph 56(1)(n) of the Act would apply to include the amount in the dependant's income.

Randy Hewlett, B.Comm.

XXXXXXXXXX 613-941-7239
2004-009510
December 1, 2004

Dear XXXXXXXXXX:

Re: Employee Dependant Scholarship Program

We are writing in response to your letter of September 14, 2004, wherein you asked for our opinion on the taxable status of an employee dependant scholarship program (the "Program") proposed by your company.

In your letter, you described the Program as follows:

1. The Program is an annual reimbursement program that covers base tuition for post-secondary studies for a period of XXXXXXXXXX years.

2. Eligibility of a dependant under the Program is based on the following criteria:

(a) The recipient must be a dependant child of an active, part-time, disabled, retired or deceased employee of the company, and
(b) The dependant must have achieved an overall average of 70% in the graduating year of secondary school.

3. Acceptance will be limited to XXXXXXXXXX eligible dependants. Selection will be based on the best XXXXXXXXXX marks in the graduating year of secondary school.

4. To receive reimbursement under the Program, the dependant must pass the current term of study at a qualifying post-secondary institution and be eligible to progress to the next level of study.

5. Reimbursement will be made directly to the student.

You have requested that we provide a ruling that a reimbursement under the Program is scholarship income of the dependant under paragraph 56(1)(n) of the Income Tax Act (the "Act"). In your view, when an employee's dependant competes for a limited number of scholarships offered by an employer and selection is based on scholastic achievement, the amount received by the dependant is not income of the employee under paragraph 6(1)(a) of the Act, but income of the dependant under paragraph 56(1)(n).

In our discussion (Hewlett/XXXXXXXXXX), you indicated that your viewpoint is based on the position of the Canada Revenue Agency (the "CRA") published in Interpretation Bulletin IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants. XXXXXXXXXX. In your view, the Program as proposed falls within the CRA's position in IT-75R4.

Our Comments

Paragraph 6(1)(a) of the Act includes in a taxpayer's income "the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment". In our view, paragraph 6(1)(a) of the Act is a provision of broad import and will include in a taxpayer's employment income the value of a benefit that was directly received or enjoyed by another person because of the taxpayer's office or employment, including employer-provided scholarships to dependants of employees.

On an administrative basis, however, the CRA will accept that certain employer-provided scholarships to dependants of employees can instead be included in the income of the dependant under paragraph 56(1)(n) of the Act. Paragraph 9 of IT-75R4 states:

As a matter of good employee relations, an employer may pay tuition fees for, or give a grant or award to, one or more school-age or university-age children of employees. Such a payment is considered to be a scholarship or bursary. It is income of the child under subparagraph 56(1)(n)(i) if the payment is made as part of a plan to help a certain number of children who are selected on the basis of their scholastic records or other achievements or qualities. This treatment is particularly likely if the selection is made by a board or committee or by persons not connected with the employer, such as schoolteachers.

For paragraph 56(1)(n) of the Act to apply to the dependant's scholarship, there must be objective selection criteria that focus on the accomplishments of the dependant, for example, scholastic achievement. In this regard, it is our view that the employer's selection criteria for scholastic achievement must be higher than the minimum entrance requirements for most post-secondary institution; otherwise, any dependant who enters a post-secondary education program would qualify for a scholarship. In addition, there must actually be a limited number of scholarships provided by the employer. Whether or not there are actually a limited number will always be a question of fact. The number of dependants chosen from those who are otherwise eligible should be low enough that most employees could not expect their dependants to be selected. Collectively, these criteria will ensure that the merit of the dependant is prevalent in the employer's selection rather than the employee's relationship with the employer.

On the basis of the above, we are of the view that a scholarship to the dependant of an employee under the Program you described must be included in the employee's income under paragraph 6(1)(a) of the Act. In our view, the Program falls short of the criteria outlined above, for all of the following reasons:

1. The minimum average under the Program is 70%, which is generally the minimum requirement for entrance into most post-secondary schools. It is conceivable that most dependants who attend post-secondary school would, therefore, likely meet the basic scholastic achievement criteria for consideration;

2. A dependant who receives a scholarship in the first year of post-secondary education will also receive an award in each of the next three years as long he or she meets the basic passing requirements of the institution; and

3. Each year the employer will consider up to XXXXXXXXXX additional employee dependants for a scholarship. We understand, however, that under the previous program when an unlimited number of dependants were considered for a scholarship, less than XXXXXXXXXX dependants actually received an award. Under the circumstances, it would be difficult to conclude that the Program is restructured so that only a limited number of scholarships are awarded, when in fact every employee dependant who enters a post-secondary education program will probably receive a scholarship.

In terms of a situation where the employment relationship is severed, for example, where a scholarship is awarded to the dependant of a retired or deceased employee, we are of the view that paragraph 56(1)(n) of the Act would apply to include the amount in the dependant's income.

Finally, we would like to note that IT-75R4 will be clarified to reflect the comments outlined above. We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch