19 April 2007 Internal T.I. 2007-0222951I7 - Scholarship exemption and non-residents

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 operation of the amended subsection 56(3) of the Act, when applied to a non-resident, creates a problem that is circular in nature.

Position: In our view, the problem as described in the operation of the current or the proposed amended subsection 56(3) does not exist. In our view, a non-resident could have an income inclusion of nil pursuant to paragraph 56(1)(n). If as a result, the "all or substantially all" rule in section 118.94 is not met in respect of the taxable income earned in Canada of the non-resident pursuant to section 115, then the non-resident would not be eligible to apply the education credit in subsection 118.6(2). However, if a non-resident has other sources of income in Canada and the "all or substantially all" rule in section 118.94 is met, the non-resident would be eligible to apply the education credit.

Reasons: Reading of the legislation.

		 					April 19, 2007

	HEADQUARTERS				HEADQUARTERS
	International Tax Directorate		Income Tax Rulings
	Client Services Division	  	Directorate
							J Bertram, CGA, CPA(vt)
	Attention: Jeffrey Haynes		(613) 957-8954

							2007-022295

Subsection 56(3) and non-residents

We are writing in response to your February 2nd, 2007 inquiry and our subsequent telephone discussions (Haynes/Tiu; Haynes/Bertram) regarding a possible circularity problem in calculating the scholarship exemption with respect to a non-resident. It is your view that in order for a non-resident to be eligible for the full scholarship exemption per amended subsection 56(3) of the Income Tax Act (the "Act"), he or she must first satisfy section 118.94 of the Act (the "90% rule).

Our comments:

The question of whether a non-resident is entitled to the scholarship exemption is only relevant if the scholarship itself must otherwise be included in income. For purposes of calculating the taxable income earned in Canada for a non-resident under Part I of the Act, the rules in subsection 2(3) and section 115 of the Act apply. Paragraph 115(2)(d) of the Act deems a person who is in full-time attendance at a Canadian university or college to be employed in Canada for purposes of determining the non-resident's income under subsection 2(3) of the Act. Subparagraph 115(1)(a)(iv) of the Act provides that the income of such a non-resident is the amount determined under paragraph 115(2)(e) of the Act. It is noteworthy for purposes of this discussion that subparagraph 115(2)(e)(ii) of the Act specifies that the non-resident's income is the amount that would be required to be included by paragraph 56(1)(n) of the Act if the non-resident were resident in Canada.

A resident of Canada is required to include in income the amount of the scholarship received (subparagraph 56(1)(n)(i)) less the amount of the scholarship exemption (subparagraph 56(1)(n)(ii)). The scholarship exemption itself is calculated per amended subsection 56(3) of the Act. For the 2006 and subsequent taxation years, scholarships, fellowships and bursaries will be excluded from income if received in connection with an educational program for which the individual may claim the education tax credit. Where all scholarships relate to programs that are eligible for the education tax credit, the income inclusion pursuant to paragraph 56(1)(n) of the Act would be nil. However, if the programs are not eligible for the education tax credit, then pursuant to subparagraph 56(3)(c), the exemption is limited to the lesser of $500 and the actual scholarship received.

Pursuant to subparagraph 115(2)(e)(ii) of the Act, the income inclusion arising from paragraph 56(1)(n) of the Act is determined as though the person were a resident of Canada. It is our view that this residency assumption applies to both subparagraphs 56(1)(n)(i) and (ii) and therefore must also apply to the mechanics of the calculation in subsection 56(3) of the Act. In other words, in computing the scholarship exemption for purposes of the income inclusion, eligibility for the education tax credit must be ascertained as though the student were a resident of Canada.

If an income inclusion results, only then will it be necessary to determine whether in fact the person is eligible for the education credit. It is the determination of tax payable that will trigger the application of section 118.94 of the Act, which provides that the education credit is not available unless at least 90% of the non-resident's income for the year is included in computing taxable income earned in Canada for the year.

If, by operation of paragraph 56(1)(n) of the Act, as described above, the scholarship was not included in the non-resident's income and as a result the student does not meet the 90% rule, then the education credit will not be available. However, if the scholarship was included, and constituted the only source of income or if the non-resident student had other sources of income included in computing taxable income earned in Canada and the 90% rule is met, the non-resident would be eligible for the education credit.

We trust that the foregoing is satisfactory.

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