29 September 2010 External T.I. 2010-0368431E5 - Education Tax Credit for internships

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: Does ¶7 of IT 515R2 apply to internship programs?

Position: Yes

Reasons: Legislation

XXXXXXXXXX
2010-036843 George A. Robertson, CMA

September 29, 2010

Dear XXXXXXXXXX :

Re: Education Tax Credit (ETC) for Internships

This is in response to your request of May 17, 2010 requesting our views on claiming the ETC under subsection 118.6(1) of the Income Tax Act (the Act).

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. We are however, prepared to provide the following general comments, which may be of assistance.

Based on our understanding, the scenario is:

A student is enrolled with an educational institution that arranges, supervises and evaluates the internship placement. The internship is performed in the field as well as at the educational institution. The student receives a small salary as compensation, while in the field and the student is required to pay fees to the educational institution.

Our comments:

Pursuant to subsection 118.6(2) of the Act, an individual's ETC is based on the number of months that the student is enrolled in a "qualifying educational program" (QEP) as a full-time student at a "designated educational institution" (DEI). A part-time student may also be eligible for the ETC if he or she is enrolled in a "specified educational program" (SEP). These terms are defined in subsection 118.6(1) of the Act.

For years prior to 2004, the former definition of a QEP in the Act excluded any program taken by a student:

(i) during a period in respect of which the student receives income from an office or employment, and

(ii) in connection with, or as part of the duties of, that office or employment.

The federal budget of March 2004 removed this exclusion and the change was applicable to the 2004 and subsequent tax years. This means that provided all other requirements are met, a course or program taken by an individual in connection with his or her employment and during which time the individual received income from that employment is a QEP eligible for the education tax credit.

Where the student is enrolled at a DEI but does not qualify as a full-time student, the student may still qualify for the part-time ETC under a SEP. A SEP means a program that would be a QEP if the definition of QEP were read without reference to the words "that provides that each student taking the program spend not less than 10 hours per week on courses or work in the program". The definition for a SEP was added by the 1998 budget, effectively, allowing education programs for the ETC with respect to part time education. The IT 515R2 has yet to be updated to reflect these budget changes.

However, subsection 118.6(1) of the Act specifies that a QEP or a SEP for the purposes of the education tax credit does not include a program if the student receives, from a person with whom the student is dealing at arm's length, any allowance, benefit, grant or reimbursement for expenses in respect of the program other than such things as a scholarship or bursary, a Canada student loan or certain government financial assistance paid pursuant to an agreement with Human Resources and Skills Development Canada. An individual is not entitled to claim the education tax credit where there has been any amount of reimbursement, allowance or benefit from an arm's length person (including an employer with which the student deals at arm's length).

Generally, eligible tuition fees are described in paragraph 26 of the Interpretation Bulletin IT-516R2 and relate primarily to the process of instruction whereas the fees described in paragraph 27 of IT-516R2 relate to some other goods or services provided by the educational institution and are not considered eligible tuition fees.

In our view, where the fees relate only to a placement fee charged in order to allow the student to receive employment during a semester while gaining experience in a particular field, the fee is not to be considered tuition, however, where the fee pertains to instruction and is a requirement of an academic program, the fee would be eligible to be included in the tuition fee.

While we trust that these comments will be of assistance, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

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