Principal Issues: What is the tax treatment of financial assistance granted to students?
Position: General comments.
XXXXXXXXXX 2014-055490 I. Landry, M. Fisc.
February 18, 2021
Dear Sir,
Subject: Tax treatment of student financial assistance
This is in response to a letter from XXXXXXXXXX asking for our comments on the tax treatment of financial assistance offered by the Ministère de la Santé et des Services sociaux du Québec ("MSSS") to students admitted to the Master's program in advanced pharmacotherapy.
XXXXXXXXXX.
All legislative references herein are to the provisions of the Income Tax Act (the "Act").
COMMENTS
This technical interpretation provides general comments about the provisions of the Act and related legislation, where applicable. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
In order to determine the appropriate tax treatment of amounts received as financial assistance, it is first necessary to ascertain the nature of the assistance and its qualification as, for example, a scholarship or employment income. The nature and classification of an amount received must be determined on a case-by-case basis, taking into account all the facts relevant to a beneficiary's situation. This determination depends on the main reason for which the financial assistance was granted, the conditions associated with it and the nature of the relationship between the parties.
To assist you in making that determination, we refer you to our general position on the tax treatment of amounts received as financial assistance set out in Income Tax Folio S1-F2-C3, Scholarships, Research Grants and Other Education Assistance (the "Folio") (footnote 1).
We suggest that you read the Folio in its entirety. However, here are some general comments from the Folio that you may find particularly interesting.
Scholarships
Paragraphs 3.7 and 3.8 of the Folio indicate that scholarships are amounts paid or benefits given to students to enable them to pursue their education. A scholarship is intended, among other things, for studies at a university and usually helps a student to continue studies with a view to obtaining a university degree. Usually, a student is not required to do any particular work in exchange for a scholarship.
Paragraph 3.1 indicates that paragraph 56(1)(n) generally requires a taxpayer to include in income the amount by which certain amounts received in the year exceed the amount known as the scholarship exemption. Under subparagraph 56(1)(n)(i), those amounts include scholarships.
Paragraph 3.2 states that the scholarship exemption is calculated under subsection 56(3) and exempts the first $500, or where certain conditions are satisfied, up to the full amount described in paragraph 56(1)(n)(i). The net amount is included in income in the year received.
Subsection 56(3) also provides for an exemption in excess of $500 if, among other things, a scholarship is received in connection with a taxpayer's enrolment in certain educational programs. We refer you to paragraphs 3.96 and 3.97 of the Folio on the meaning of the expression "received in connection with the taxpayer's enrolment" and to paragraph 3.90 of the Folio for more details on the deductions provided for in subsection 56(3).
In addition, paragraph 3.91 of the Folio deals specifically with full-time students and paragraphs 3.93 to 3.95 of the Folio with part-time students.
Training allowances
Paragraph 3.21 of the Folio indicates that some training allowances given by certain granting authorities, including provincial student assistance plans, are considered to be scholarships or bursaries and are used in computing a taxpayer's income under subparagraph 56(1)(n)(i). Normally, a student is not expected to do specific work for the payer in exchange for a bursary.
Employment income
However, subparagraph 56(1)(n)(i) does not apply to amounts received in respect of, in the course of or by virtue of an office or employment. As indicated in paragraph 3.12 of the Folio, education-related expenses paid by the employer will generally be taxable to the student as employment income under section 6.
Consequently, in order to determine the appropriate tax treatment of financial assistance provided to a student, it is necessary to determine whether the financial assistance is an amount received in respect of, in the course of or by virtue of an office or employment.
Financial assistance may indeed be received in respect of, in the course of or by virtue of an office or employment if an employment relationship exists at the time the assistance is paid.
As stated in paragraph 3.14 of the Folio, a student may receive a scholarship or bursary in return for undertaking to commence employment after completion of the studies or course of training. If an employment relationship has not yet been established when the student receives those amounts, they are normally considered to be a scholarship for the purposes of paragraph 56(1)(n).
Paragraph 3.16 of the Folio indicates that where the student is committed to return all or a portion of the scholarship or bursary in the future under certain circumstances (e.g., as a result of a breach of an employment agreement), the amount received will be considered a repayable award. In this regard, paragraph 3.49 of the Folio adds that the fact that the taxpayer may be required to repay all or a portion of the scholarship, fellowship or bursary in the future (for example, where there has been a breach of the conditions of the award) will not change the characterization of the award for tax purposes.
Determining whether an employment relationship exists, however, is a question of fact and law that can only be resolved after a detailed study of all the facts surrounding a particular situation. Our Directorate does not conduct such a study in the context of a request for a technical interpretation. However, issue 3.29 of the Folio provides a guide to help you make that determination.
We hope you find our comments of assistance.
Best regards,
Michel Lambert, CPA, CA, M. Fisc.
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 This Folio is available on our website at the following address:
https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-2-students/income-tax-folio-s1-f2-c3-scholarships-research-grants-other-education-assistance.html