29 September 2010 External T.I. 2010-0364111E5 - Tax Implications of 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 taxability of amounts paid under an employer's scholarship program.

Position: If the amounts are paid by an arm's length employer for a post-secondary school educational program for an employee's family member, the amounts are taxable to student. If the amounts are paid by a non-arm's length employer, the same amounts are taxable to the employee.

Reasons: CRA's revised policy for employer-provided scholarship programs for arm's length scenario. CRA's original policy would be applicable for employer-provided scholarship programs for non-arm's length scenario.

XXXXXXXXXX
									2010-036411
									George A.  Robertson, CMA
September 29, 2010

Dear XXXXXXXXXX :

Re: Setting up a Scholarship Program

This is in response to your electronic letter of April 19, 2010 where you requested our views regarding specific queries on setting up a scholarship program for children of your employees.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office.

As a result of several recent court decisions (i.e., DiMaria, Bartley and Okonski) the CRA reviewed its existing policy (as outlined in Interpretation Bulletins IT-470R and IT-75R4) on employer-provided scholarships, bursaries and tuition benefits.

As a result of this review, the CRA now accepts that where an arm's length employer provides a post-secondary scholarship, bursary or free tuition 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") and not the employee's income as a taxable benefit under paragraph 6(1)(a) of the Act, regardless of the criteria used to award the particular amount. For paragraph 56(1)(n) of the Act to apply to the dependent's scholarship, there must objective selection criteria that focus on the accomplishments of the dependent, for example, there must be a genuine scholarship earned by the child of the employee/minor shareholder; the scholarship program would need to available to children of all employees, not just the children of key employees/shareholders. In addition, there can be no decrease in the employee's salary to fund or partially fund the scholarship. If the particular student is eligible to claim the education tax credit under subsection 118.6(2) of the Act, the entire amount may be exempt from tax pursuant to subsection 56(3) of the Act. The employer is still required to report the amount on a T4A slip in accordance with paragraph 200(2)(a) of the Income Tax Regulations.

We would like to point out that the above-described position does not apply to an employer-provided scholarship program for attendance at an elementary or secondary school (private or otherwise). These amounts will continue to be treated as a taxable benefit to the particular employee. Further information on education related benefits can be found on CRA's website at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/dctn/ttn-eng.html.

Income Tax Technical News (ITTN) No. 40, states in part, "The employer gift and award policy will not apply to non-arm's length employees (e.g., relative of proprietor, shareholders of closely held corporations) or related persons of the non-arm's length employee; . . ." [Emphasis added]. The Dictionary of Canadian Law, third edition, states, a "closely held corporation is a private corporation the shares of which are not listed on a stock exchange." The Black's Law Dictionary, Eighth Edition, states, closely held corporation refers to close corporation- "A corporation whose stock is not freely traded and is held only by a few shareholders (often within the same family)."

The arm's length determination is a question of fact, determined on a case-by-case basis. There is no threshold for determining arm's length from a corporation. Arm's length and non-arm's length are not defined in the Act. Some criteria to be considered could be:

• Is the minority shareholder and employee also a director of the corporation?
• Being a minority shareholder and employee could be viewed as a conflict of interest.
• Whether or not a minority shareholder has a direct management influence in a corporation may also be relevant in assessing that shareholder's relationship with the particular corporation.
• If the corporation meets the definition of closely held corporation, there could be non-arm's length employees.

Where the parties are at arm's length, the new policy would be applicable. Provided the student is eligible to claim the Education Tax Credit, the income may be exempt from tax.

However, where the parties are at non-arm's length, the previous policy would be applicable, that being, generally, where an employer provides scholarship, bursary or tuition amounts to the dependent of an employee, we consider it to be a taxable benefit of employment to the employee under paragraph 6(1)(a) of the Act.

Although, there is no limit as the amount of scholarship, bursary or free tuition to be reported as income, the 2010 Budget clarified that an amount will be eligible for the scholarship exemption only to the extent it can reasonably be considered to be received in connection with enrolment in an eligible educational program for the duration of the period of study related to the scholarship.

We trust that the above comments address your concerns.

Yours truly,

Sharmini Ratnasingham
Assistant Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch