Principal Issues: 1. Is education assistance received by an Indian from a First Nation exempt from tax?
Position: 2. Likely, yes.
Reasons: 3. Generally, scholarships and bursaries are not included in income, due to the scholarship exemption, when received in connection with a program for which the student is able to claim the education tax credit.
XXXXXXXXXX 2011-040582 P. Burnley (613) 957-2100
June 27, 2011
Dear XXXXXXXXXX :
Re: Education Assistance Received by an Indian
This is in response to your letter of May 8, 2011, in which you ask for our comments on a First Nation education assistance program. In the situation you have outlined, an Indian, as that term is defined in subsection 2(1) of the Indian Act, received funds from a First Nation Education Program funded by Indian and Northern Affairs Canada ("INAC") to assist with education expenses. You would like to know if these funds are exempt from tax.
The situation outlined in your letter relates to a factual situation, involving a specific taxpayer. 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". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. Although we cannot comment on a specific situation, we are able to provide the following general comments, which may be of assistance.
In our view, scholarships and bursaries are amounts paid or benefits given to students to enable them to pursue their education. Bursaries can include amounts paid to defray living expenses, as well as amounts that are directly related to the cost of the education. Scholarships and bursaries are generally included in income pursuant to paragraph 56(1)(n) of the Income Tax Act (the "Act"). Whether an amount is a scholarship or bursary can only be determined after a review of the facts in each situation.
For taxation years after 2005, subsection 56(3) of the Act was amended to expand the scholarship exemption so that most scholarships and bursaries received by students (including scholarships or bursaries received by Indians from INAC, the Indian's First Nation or another source) are exempt from income tax, subject to certain criteria. Specifically, scholarships and bursaries included in income pursuant to paragraph 56(1)(n) of the Act, and received by a student in connection with the student's enrolment in a program for which the student is entitled to claim the education tax credit are exempt from tax. Information on the education tax credit can be found on our website at http://www.cra-arc.gc.ca/students/. As a result of this expanded exemption, most scholarships and bursaries received are exempt from tax.
If an Indian student is not eligible for the education tax credit, the scholarship or bursary may still be exempt from tax if it came from INAC (either directly or through the student's First Nation) as part of INAC's "Post-Secondary Education Program". This means that amounts received from either INAC's "Post-Secondary Student Support Program" or its "University and College Entrance Preparation Program" are treated as tax-exempt. This position is under review but continues to be applied by the CRA. There is currently no requirement to issue T4A slips for these amounts.
Scholarships and bursaries are included in the income of the recipient, net of the applicable scholarship exemption. A scholarship or bursary that is fully exempt from income tax does not have to be reported on the student's income tax return. In the event that a scholarship or bursary is not fully exempt from tax, the scholarship exemption under subsection 56(3) of the Act is generally limited to $500.
We trust that these comments will be of assistance.
Yours truly,
Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch