25 October 2012 External T.I. 2012-0434941E5 - scholarship and non-resident student

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: What are the proper income tax treatment and reporting requirements for scholarships or bursaries paid by an employer in Canada to an employee's children that are citizens of the United States? Is there any limit to the amount of the scholarship that can be paid to an employee's children?

Position: It depends on the facts.

Reasons: The legislation.

XXXXXXXXXX 2012-043494
N. Shea-Farrow
October 25, 2012

Dear XXXXXXXXXX:

Re: Scholarships or bursaries paid to non-resident students

This is a response to your letter of January 17, 2012 asking what are the proper income tax treatment and reporting requirements for scholarships or bursaries paid by an employer in Canada to an employee's children, that are citizens of the United States. You would also like to know if there is any limit to the amount of the scholarship or bursary that can be paid by an employer to an employee’s children.

You have stated that an employee moved from the United States and began employment in Canada. The employee’s children remain in the United States to continue their post-secondary education.

Comments

You first need to determine whether the recipient of the award is a resident of Canada. This is a question of fact. Citizenship does not determine residency. We suggest that the recipient of the award refer to Interpretation Bulletin IT-221R3 Determination of an Individual’s Residence Status to determine if the recipient of the award is a Canadian resident. However, we are prepared to offer the following general comments, which may be of assistance.

The Canada Revenue Agency's general view regarding scholarships and bursaries is contained in Interpretation Bulletin IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants (IT-75R4) which is available on the CRA web site at www.cra-arc.gc.ca.

Generally speaking, where an arm’s length employer provides a post-secondary scholarship or bursary to family members of an employee under a scholarship program, the amount will be included in the particular student’s income under paragraph 56(1)(n) of the Income Tax Act (the “Act”). If the student is eligible to claim the full-time education tax credit under subsection 118.6(2) of the Act, the entire amount may be exempt from tax under subsection 56(3) of the Act.

Subsection 115(2) of the Act provides special rules pertaining to certain non-resident individuals including a student in full-time attendance at an educational institution in Canada that is a university, college or other educational institution providing courses at a post-secondary level in Canada or a student attending such an educational institution outside Canada who in any preceding tax year ceased to be resident in Canada in the course of or subsequent to moving to attend at the institution, and who are in receipt of scholarships or bursaries. In accordance with subparagraph 115(2)(e)(ii) of the Act, a non-resident individual subject to the rules of subsection 115(2) of the Act is taxable on all amounts received from a source in Canada that would be required by paragraph 56(1)(n) of the Act to be included in computing income for the year if the individual were resident in Canada throughout the year. The scholarship exemption under subsection 56(3) of the Act for purposes of computing the income under paragraph 56(1)(n), would determine the eligibility for the education tax credit as though the student were a resident of Canada.

However, if a scholarship or bursary is paid to a non-resident individual of Canada who was never a resident of Canada and attends an educational institution outside of Canada that individual is not taxable in Canada. Despite this, under paragraph 200(2)(a) of the Income Tax Regulations, every payer, of a scholarship or bursary, that is subject to the Act, must file a T4A Summary of Pension, Retirement Annuity, and Other Income, and a related T4A Statement of Pension, Annuity, and Other Income (T4A Statement), to report the amount. A T4A Statement is required even if the individual's scholarship exemption completely eliminates the amount of the scholarship or bursary included under subparagraph 56(1)(n)(i) of the Act during the year or the individual is not taxable in Canada. However, under the CRA's administrative exception, a payer is only required to issue a T4A Statement where the total scholarship or bursary paid to, or on behalf of, an individual exceeds $500 in the year. We note that there is no statutory requirement to withhold income taxes on the payment of a bursary described in paragraph 56(1)(n) of the Act.

While there is no particular limit on the amount of the scholarship or bursary that can be paid to an individual the amounts must be paid to students to enable them to pursue their education. In addition, the deductibility of a scholarship or bursary payment by an arm’s length employer to an employee’s child depends or whether the payment was laid out to earn income subject to the limitations in paragraph 18(1)(a) of the Act, which must be determined on a case-by-case basis. Section 67 of the Act states that no deduction shall be made in respect of an outlay or expense in respect of which is otherwise deductible under the Act, except to the extent that the outlay or expense is reasonable in the circumstances.

We trust our comments will be of assistance.

Sharmini Ratnasingham
For Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch