15 February 2007 Internal T.I. 2006-0193891I7 - Transfer of Tuition Tax Credits to Brother

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: Whether the taxpayer may claim any unused tuition or educational tax credits in respect of a sister that was wholly dependent on the taxpayer when she was XXXXXXXXXX years old.

Position: Question of fact.

Reasons: Definitions of child and parent in section 252.

								February 15, 2007

	Burnaby-Fraser Tax Services Office		HEADQUARTERS
								Income Tax Rulings
	Attention: David Paradis	  		Directorate
	Tax Avoidance Auditor				S. Lewis
(613) 941-7239

								2006-019389 

The transfer of tuition and educational tax credits

This is in response to your correspondence of June 29, 2006, and acknowledges subsequent telephone conversations regarding whether the taxpayer (the "Brother") may claim any unused tuition or educational tax credits in respect of a sister (the "Sister") that lived with the Brother when she was 16 and 17 years old.

We have the following understanding of the facts:

• In XXXXXXXXXX the father of Brother and Sister died.
• At that time Brother and Sister lived with their mother (the "Mother") in XXXXXXXXXX.
• Both Brother and Sister received orphan benefits from the Provincial Government of approximately $XXXXXXXXXX per month from XXXXXXXXXX to at least XXXXXXXXXX.
• In XXXXXXXXXX, Brother ceased to live with Mother.
• In XXXXXXXXXX, Mother asked Sister to leave her house.
• In XXXXXXXXXX, when Sister was XXXXXXXXXX, she began living with Brother in XXXXXXXXXX.
• Brother and Sister shared a basement suite with XXXXXXXXXX other people (including another brother).
• The cost of room and board was $XXXXXXXXXX per month per person.
• From XXXXXXXXXX to the summer of XXXXXXXXXX Sister was attending high school and Brother paid for Sister's expenses that were not covered by her orphan benefits.
• In the summer of XXXXXXXXXX Brother went XXXXXXXXXX and Sister stayed with her aunt.
• When Brother returned from XXXXXXXXXX, Sister resumed living with Brother.
• Sister stopped living with Brother and moved in with her boyfriend in the summer of XXXXXXXXXX.
• Brother claimed Sister as his child in his XXXXXXXXXX tax return. The claim was accepted but not reviewed by an auditor.
• Sister is now XXXXXXXXXX years old and living with her husband and child.
• Sister will be taking some educational courses.
• Some courses taken by Sister will be at a private high school and others will be at the college level. As a result of taking certain eligible courses, Sister will be entitled to claim tuition and educational tax credits. At issue is whether Sister qualifies as a child of Brother so that she may transfer to him her unused tuition and educational tax credits in respect of the eligible courses she will be taking.

Our Comments:

Subsection 118.5(1) of the Income Tax Act (the "Act") sets out the circumstances under which a student may determine a tuition tax credit for tuition fees paid to educational institutions in and outside Canada. Subsection 118.6(2) of the Act authorizes a student to claim an education tax credit for each month in the calendar year during which the student is enrolled in a qualifying educational program at a designated educational institution. These credits are discussed in detail in Interpretation Bulletin IT-516R2, Tuition Tax Credit, and Interpretation Bulletin IT-515R2, Education Tax Credit. It should be noted, however, that both the tuition tax credit and educational tax credit generally are only available when the student is attending courses at a post-secondary educational institution or certain educational institutions certified by the Minister of Human Resources and Skills Development and that high school courses are not eligible for the tax credits.

If a student qualifies for tuition and/or education tax credits, the student may transfer the unused portion of the credits, up to the amount determined under section 118.81 of the Act, to the student's spouse or common-law partner or the student's parent or grandparent. It should be noted that under proposed legislation, a student would be able to transfer another credit, the proposed textbook tax credit, to the student's parent or grandparent.

Brother may claim the above-mentioned credits if he is considered to be the parent of Sister. The term "parent" is not defined in the Act; however, subsection 252(2) of the Act provides that a parent of a taxpayer includes, inter alia, a person whose child the taxpayer is, whose child the taxpayer had previously been within the meaning of paragraph 252(1)(b), or who is a parent of the taxpayer's spouse or common-law partner. As such, if Sister could be considered Brother's child, Brother would qualify as her parent for purposes of the transfer of the mentioned tax credits. The determination of whether Sister could be considered Brother's child would have to be made with reference to the years XXXXXXXXXX to XXXXXXXXXX, when they resided together. The fact that Brother previously claimed Sister as his child in his XXXXXXXXXX income tax return is irrelevant in determining whether Sister should be considered the child of Brother because the claim was not subject to an audit and simply accepted at face value.

Subsection 252(1) of the Act provides an extended meaning of the phrase "child of the taxpayer". Subsection 252(1) was amended to replace the reference to "natural parent" in paragraph (a) thereof and to repeal paragraph (d) thereof, which referred to "adopted child," with application on Royal Assent on July 20, 2005. However, subsection 252(1) must be applied to the period XXXXXXXXXX to XXXXXXXXXX as it read prior to the mentioned amendments. Only paragraphs 252(1)(b) and (d) of the Act, as they read in XXXXXXXXXX through XXXXXXXXXX, are relevant in determining whether Sister is a child of Brother and these paragraphs are discussed below. (Paragraphs 252(1)(a) and (c) are not relevant since clearly Brother, being a brother, is not the natural parent of Sister and neither is Sister a child of Brother's spouse or common-law partner.) Pursuant to paragraph 252(1)(d), a child of a taxpayer includes a person who is an adopted child of the taxpayer. Pursuant to paragraph 251(6)(c) of the Act, an individual is considered to be adopted as a child of a person if the individual is adopted legally or in fact. Consequently, if Sister is adopted either legally or in fact by Brother, she will be considered the child of Brother, pursuant to paragraph 252(1)(d).

There is no evidence of a formal or legal adoption (adoption in law); as such, it is necessary to determine whether Brother adopted Sister in fact (de facto). In Canadian jurisprudence relating to the Act, the concept of de facto adoption has received consideration. The courts have generally not recognized a de facto adoption to take place unless the "adoptive parent" lived in close proximity to the child and exercised parental care and guidance on a continuing basis. Courts have suggested that a continuing basis may be as little as three years. In Racine and Racine v. Woods, [1983] 2 S.C.R. 173, Justice Wilson noted the wisdom of the legislation in Manitoba's Child Welfare Act, 1974, c.30. in requiring non parental guardians to live with and care for a child for three consecutive years to allow for de facto adoptions.

From the facts provided it does not appear that Brother will qualify as an adoptive parent of Sister pursuant to paragraphs 252(1)(d) and 252(1)(c). It is unlikely that Brother would satisfy the requirements of living in close proximity and exercising parental care and guidance on a continuing basis since from XXXXXXXXXX to the summer of XXXXXXXXXX Sister lived with him for two relatively short periods of time, and such periods were separated by a period (i.e., the summer of XXXXXXXXXX) during which Brother was away on a work assignment and Sister lived with her aunt.

Paragraph 252(1)(b) of the Act provides another way by which Sister might be considered a child of Brother. Paragraph 252(1)(b) indicates that a child of the taxpayer includes "a person who is wholly dependent on the taxpayer for support and of whom the taxpayer has, or immediately before the person attained the age of 19 years had, in law or in fact, the custody and control." The quoted wording contains two requirements, which both must be satisfied in order to apply paragraph 252(1)(b) to a particular situation. The first requirement is that for a person to be considered a child of a taxpayer, the person must be "wholly dependent on the taxpayer for support." This generally means that the person must be financially dependent on the taxpayer such that the taxpayer provides almost entirely for the person's well being. The second requirement is that the taxpayer has (or had, immediately before the person attained the age of 19 years), in law or in fact, custody and control of the person. This requirement is similar but more onerous than the common law tests of de facto adoption discussed above. In general terms, custody and control involve the right of determining the residence, protection, care (physical and moral), education, and religion of the child. It also requires that the child submit to the "parental" control. See Curzi v. The Queen, [1994] 2 CTC 220; Robinson v. the Queen [2000] TCJ No. 477.

From the facts, it would appear that Sister would not be considered Brother's child, pursuant to paragraph 252(1)(b) of the Act. Sister does not appear to have been wholly dependent on Brother for support in the XXXXXXXXXX taxation years as her orphan benefits of $XXXXXXXXXX per month were used to help pay for her basic living expenses, which included room and board of $XXXXXXXXXX per month. Also, it does not appear that, based on the facts, the custody and control requirement in paragraph 252(1)(b) is met. In conclusion, based on the facts, Sister does not qualify as a child of Brother for purposes of the transfer of the tuition and education tax credits.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch