17 September 2007 External T.I. 2006-0215701E5 - 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: General comments only - proposed/completed transactions.

Reasons: Question of fact.

XXXXXXXXXX 						Michael Cooke
							2006-021570
September 17, 2007

Dear XXXXXXXXXX:

Re: Scholarship Program- 56(1)(n) of the Income Tax Act (the "Act")

We are writing in response to your letter of November 17, 2006, wherein you asked for our opinion on the taxable status of a scholarship program that has been developed by one of your clients. We understand that your client would like to market this scholarship program to its various corporate clients. The basic details of the scholarship program are described in general as follows:

• An employer will provide scholarships or rewards (subject to a maximum amount) to eligible full-time students who are enrolled at a qualified post-secondary institution and who are dependants of certain current or retired employees meeting certain other eligibility criteria.
• In order to receive a scholarship, the student must have and maintain a certain minimum grade point average.
• Students who do not qualify for a scholarship may qualify for an award program that would be fully taxable as income to the particular employee parent sponsor and not the particular student.
• It is understood that the administration of the scholarship program will be undertaken by someone other than the particular employer.

You have requested that we confirm that the amounts under the scholarship program would be income of the dependant under paragraph 56(1)(n) of the Act. You also maintain that the combination of the scholarship program with the taxable awards program would not result in the scholarship amounts being taxable to the particular employee.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Circular and the other publications referred to in this letter are available on our website at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office.

The determination of the income tax treatment of payments, such as those described in this letter, involve questions of fact that can only be determined after reviewing all of the relevant documentation and agreements related to the particular scholarship program. However, based on the limited information provided to us, we are prepared to offer the following general comments, which may be of assistance.

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) 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) to apply to such scholarships, 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 institutions; 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.

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) would generally apply to include the amount in the dependant's income.

Where an individual is otherwise required to include an amount in income under paragraph 56(1)(n), if the amount is received in connection with an educational program that is eligible for the education tax credit under section 118.6 of the Act a full exemption will be available for such qualifying amounts that are received in 2006 and in subsequent taxation years pursuant to subsection 56(3). Even though a taxpayer may be eligible for a full exemption pursuant to subsection 56(3), the payer is required, pursuant to paragraph 200(2)(a) of the Income Tax Regulations, to file a T4A information return and provide the student with a T4A slip.

Finally, we would like to note that the 2007 Federal Budget proposes, for the 2007 and subsequent taxation years, that the total of all amounts received by an individual on account of scholarships and bursaries in connection with that individual's enrolment in an elementary or secondary school will also be excluded from that individual's income.

We trust our comments will be of assistance to you.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch