2015-0624271I7 Part-Time Student Scholarship Exemption

Principal Issues: In determining the scholarship exemption per subsection 56(3) as it relates to a part-time student, are the scholarship, fellowship, or bursary amounts that are received limited to the fees paid to a designated educational institution and related program material costs for the current year or can the award amounts be reduced by the total fees paid to the institution and total program-related material costs?

Position: As per paragraph 56(3.1)(b), these costs can include the total fees paid to a designated educational institution for the program plus the total program related material costs provided that these costs have not been claimed in any other year.

Reasons: 56(3.1)(b), the DOF explanatory notes and XXXXXXXXXX.

Author: Robinson, Katie
Section: 56(1)(n), 56(3), 118.6(1), 118.6(2)

                                                                                                                               March 21, 2016

      Mr. François Paris                                                                                            HEADQUARTERS
      Manager, T1 Matching                                                                                     Income Tax Rulings
      CVB                                                                                                                  Directorate
      750 Heron Rd,                                                                                                  Katie Robinson, CPA, CA
      6th Floor, room 622
      Ottawa, ON  K1A 0L5                                                                                       2015-062427

      Scholarship exemption for part-time students

We were asked to review the assessing instructions pertaining to Line 2 of the chart titled “Chart to calculate the portion of the award that must be included in income” (“Chart”), included in the 2014 P105 Pamphlet, “Students and Income Tax.”  This Chart helps students calculate the amount of scholarship, fellowship, or bursary (“award”) that must be included in income for a year, if any.  Specifically, we are commenting on the scholarship exemption as it relates to part-time students.

It is our understanding that a taxpayer received an award in 2014.  When calculating the scholarship exemption for part-time students, the taxpayer included the fees paid to a designated educational institution in respect of the program, as defined in subsection 118.6(1) of the Income Tax Act (“Act”), for both the 2013 and 2014 tax years.  Since the total fees paid were greater than the award amount received, the taxpayer reported no award income on their 2014 T1 Personal Income Tax Return (“Return”).  The taxpayer claims that the Chart is unclear as to the costs that can be claimed for the scholarship exemption.

Our Comments

Generally, paragraph 56(1)(n) of the Act requires that all amounts received as awards and certain prizes be included in income to the extent that these amounts exceed the student’s scholarship exemption calculated under subsection 56(3) of the Act.  Paragraph 56(3.1)(b) of the Act provides a specific limitation on the amount of the exemption that can be claimed by part-time students with respect to awards received in 2010 and later tax years.

For the purpose of determining the scholarship exemption for a tax year, paragraph 56(3.1)(b) of the Act allows a scholarship exemption if an award is received in connection with an educational program in respect of which the taxpayer may deduct an amount by reason of paragraph (b) of the description of B in subsection 118.6(2) of the Act (i.e., the part-time education tax credit) for the tax year, for the immediately preceding tax year, or for the following tax year (referred to as the “claim year”).  The amount permitted as a scholarship exemption in computing the taxpayer’s income for the tax year in respect of the award may not exceed the amount that is the total of amounts, each of which is the cost of materials related to the program or a fee paid to a designated educational institution in respect of the program, as defined in subsection 118.6(1) of the Act, in respect of the claim year.

Essentially, for an award that a student receives in respect of a program for which the student is able to claim the part-time education tax credit in the year of receipt of the award, the preceding year, or the following year, the scholarship exemption is limited to the total of the cost of materials related to the program and the fees paid to a designated educational institution in respect of the program that have not been applied against an award in any other tax year.  In our view, with respect to paragraph 56(3.1)(b) of the Act, the term “program” refers to the specific educational program for which the part-time education tax credit could be claimed.

Therefore, Line 2 of the Chart should include the total of the cost of materials and the fees paid to a designated educational institution in respect of the program that have not been claimed against an award in any other tax year.  The costs and fees paid are not limited to the current tax year.

However, in cases where an award is received in connection with enrolment in a program at a post-secondary level or beyond that does not qualify for the education tax credit in the year of receipt of the award, the preceding year, or the following year, the scholarship exemption under subsection 56(3) of the Act is limited to $500 for the tax year.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library.  After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases.  You may request an extension of this 90-day period.  The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer.  The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity.  You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca.  A copy will be sent to you for delivery to the taxpayer.

We hope that these comments will be of assistance to you.

Yours truly,

Pamela Burnley, CPA, CA
Manager - Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate

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