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: Deductibility to a corporation of amounts paid as scholarships to the children of shareholders and directors.
Position: General comments.
Reasons: Question of fact.
2007-022334
XXXXXXXXXX Joy Bertram, B.Comm.,
CGA, CPA (vt)
October 30, 2007 (613) 957-8954
Dear XXXXXXXXXX,
Re: Deductibility to a corporation of amounts paid as scholarships to the children of shareholders - Paragraph 18(1)(a) of the Income Tax Act (the "Act")
We are writing in response to your e-mail of February 6, 2007, wherein you asked for our opinion as to whether a corporation could deduct a scholarship payment if the winner was a child of a shareholder or director. You indicated there would be award selection criteria.
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 a scholarship payment, paid by a corporation to children of the corporation's shareholders or directors, involves questions of fact that can only be determined after reviewing all of the relevant documentation and agreements related to the particular scholarship program. However, we are prepared to offer the following general comments, which may be of assistance.
The deductibility of a scholarship payment by a corporation depends on whether the payment was laid out to earn income subject to the limitations in paragraph 18(1)(a) Income Tax Act (the "Act"), which must be determined on a case-by-case basis. Generally, such amounts that are included in income by the recipient as a scholarship under paragraph 56(1)(n) of the Act or as a benefit under paragraph 6(1)(a) of the Act would be considered deductible by the corporation; such amounts that are included in income as a shareholder's benefit under section 15(1) of the Act would not be deductible by the corporation.
Certain corporate-provided scholarships to dependants of shareholders or directors may be included in the income of the dependant, under paragraph 56(1)(n), where a bona fide scholarship program exists involving objective selection criteria, which is open to a reasonable number of applicants. The determination of whether paragraph 56(1)(n) applies can only be made on a case-by-case basis following a review of the specifics of a particular scholarship program. In other cases paragraph 6(1)(a) or subsection 15(1) may apply to the scholarship payment.
Paragraph 6(1)(a) 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 director's income the value of a benefit that was directly received or enjoyed by another person because of the director's office, including corporate-provided scholarships to dependants of directors that are not awarded based on a bona fide scholarship program involving objective selection criteria, which is open to a reasonable number of applicants.
Subsection 15(1) includes in income the value of any benefit conferred on a shareholder. In our view, where a scholarship payment to a shareholder's dependent is not awarded based on a bona fide scholarship program involving objective selection criteria, which is open to a reasonable number of applicants, the payment will normally be considered a shareholder benefit by virtue of subsection 56(2) of the Act and paragraph 15(1).
We trust that these comments will be of assistance.
Shaun Harkin,
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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