2017-0738071E5 Scholarships from Government of Japan

Principal Issues: 1. Are scholarships provided by the Government of Japan to Canadian students taxable? 2. Is part-time employment income earned in Japan by Canadian students taxable? 3. If taxable, is the income to be reported annually? 4. Does the student need to obtain any particular forms from the Government of Japan in respect of the scholarships? 5. Does the student need to obtain any particular forms from an employer in Japan in respect of part-time employment income?

Position: 1. Yes, if student is a resident of Canada, but may be fully exempted pursuant to subsection 56(3). 2. Yes, if student is a resident of Canada. 3. Yes. 4. No. 5. No.

Reasons: 1. Scholarship income included in income pursuant to paragraph 56(1)(n) and scholarship exemption provided for pursuant to subsection 56(3). 2. Residents of Canada are liable to tax on their worldwide income. 3. Income is reported for a tax year. 4. A resident of Canada is responsible for reporting scholarship income in excess of the scholarship exemption, whether or not a T4A is received from the payer. 5. A resident of Canada is responsible for reporting foreign employment income, whether or not a T4 slip is received.

Author: Graham, Kanwal
Section: 3(a); 56(1)(n); 56(1)(o); 56(3); 118.6(1) - "qualifying student," "qualifying educational program," and "designated educational institution"

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Scholarships provided by the Government of Japan to Canadian students

Dear XXXXXXXXXX:

This is in reply to the request dated August 2, 2017, and received by the Income Tax Rulings Directorate on December 28, 2017, from the Embassy of Japan regarding the income tax implications for scholarships provided by the government of Japan to students who are Canadian citizens. The scholarships are for the students to study in Japan, and are provided for one, two, five or seven-year periods. The scholarships are exempt from tax in Japan. Students are permitted to work part-time while in Japan, and their salaries are subject to income tax in Japan.

Several questions were asked in regard to the students’ income tax obligations in respect of the scholarships and salaries from part-time employment. We understand that you will be forwarding our reply on the subject to the Embassy of Japan on our behalf. Our comments on the matter are as follows.

The Japanese Ministry of Education, Culture, Sports, Science and Technology, also known by the English acronym MEXT, offers scholarships (“MEXT Scholarships”) to Canadian students wishing to pursue their studies at a Japanese university. There are three categories of MEXT Scholarships available for Canadian students: Japanese studies, research studies, and undergraduate studies. The MEXT Scholarships are for a one, two, five, or seven-year period, depending upon the particular category, but in all cases, they cover full tuition, provide a monthly allowance, and include a round-trip flight between Japan and Canada. The MEXT Scholarships are exempt from tax in Japan. Students are permitted to work part-time while in Japan, and their salaries are subject to income tax in Japan.

The Embassy of Japan in Canada receives questions from MEXT Scholarship applicants regarding their income tax obligations, and as such, has requested that the Canada Revenue Agency (“CRA”) provide answers to the following questions:

1.    Regarding the scholarships:

a.    Do the students need to declare them annually as part of their income while they are in Japan?

b.    If so, what are the necessary forms and procedures that they need to get from the Japanese government?

c.    If the scholarship income is not declared annually, is it reported as income after the students return to Canada?

2.    Regarding salaries earned in Japan:

a.    Do the students need to include them in income in Canada?

b.    If so, do they need to file returns annually while they are in Japan or can they do it upon return to Canada?

c.    What are the necessary forms/documentation that they need to obtain from their Japanese employers?

Our Comments

Residency

In order to answer the questions regarding a student’s income tax obligations in Canada, the student’s residency must first be determined. Individuals’ obligations or rights with respect to filing a Canadian income tax and benefit return for a particular year depend on their residency for income tax purposes. An individual who is a resident of Canada during a tax year is subject to Canadian income tax on his or her worldwide income from all sources. Generally, a non-resident individual is only subject to Canadian income tax on income from sources inside Canada.

Where an individual leaves Canada temporarily and keeps significant residential ties to Canada, he or she will generally be considered a factual resident of Canada. Such an individual may also be considered a resident of the other country (e.g., Japan) for purposes of a tax treaty that Canada has with that country. Where an individual is determined to be a dual resident, the residence article in the relevant tax treaty will generally provide tie-breaker rules to determine in which country the individual will be resident for purposes of the other provisions of the treaty. For more information, see the Convention between the Government of Canada and the Government of Japan. If under the tie-breaker rules in a treaty, an individual is determined to be resident in the other country, and not in Canada, then the individual will be considered to be a non-resident of Canada for purposes of the Canadian income tax rules.

Where students are determined to be residents of Canada, they are required to report their worldwide income from all sources each year, including the taxable part (if any) of scholarships, and foreign income from employment. Where income taxes are paid in the foreign jurisdiction on foreign source income, the individual may be entitled to a foreign tax credit in Canada. A student who has to pay Canadian income tax in the year is required to file an income tax return for the year. Even if no income taxes are payable in a year, a student may choose to file an income tax return if, for example, the student wants to claim a tuition amount.

Students who are studying outside of Canada may wish to refer to Guide P105, Students and Income Tax and the Canada.ca/taxes-students webpage. Additional information can be found in Information Sheet RC192, Information for Students – Educational Institutions Outside of Canada.

A student who requires information about residency may refer to Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status. Individuals who leave Canada to study abroad, and who wish to receive a written opinion regarding their residency status should complete Form NR73, Determination of Residency Status (Leaving Canada), and submit the form to the CRA.

Scholarship Income

Where a student is a factual resident of Canada and receives an amount as, or on account of, a scholarship or bursary, the amount received that is in excess of the scholarship exemption will be included in income for the tax year in which it is received. Whether a particular amount is a scholarship or bursary, or another type of assistance (e.g., a fellowship or research grant), for income tax purposes is a question of fact. Where the primary purpose of the assistance is to enable an individual to pursue an education, the amount of the assistance would generally be considered to be a bursary. Bursaries can include amounts paid to defray living expenses, as well as amounts that are directly related to the cost of the education.

Where a student receives an amount as a scholarship or bursary in the year, the first $500 of the amount is exempt from income. The total amount of scholarship income received may be eligible for a full scholarship exemption (and therefore, not subject to income tax), if the scholarship is for study at the university level and the recipient is considered a full-time qualifying student.

Currently, a “qualifying student” for a month in a tax year includes an individual who, in the month, is enrolled in a qualifying educational program as a full-time student at a designated educational institution. A “qualifying educational program” is a program that lasts at least three consecutive weeks and requires a minimum of 10 hours of instruction or work in the program each week (not including study time), at a designated educational institution. A “designated educational institution” includes universities outside Canada where the qualifying student is enrolled in a course that lasts at least three consecutive weeks and leads to a degree at the bachelor level or higher.

More information regarding the factors relevant to the determination of whether an amount is a scholarship or bursary, or a research grant, as well as the scholarship exemption, is available in our publications, Income Tax Folio S1-F2-C3, Scholarships, Research Grants and Other Education Assistance, and Guide P105, Students and Income Tax.

Employment Income

As noted above, an individual who is a resident of Canada during a tax year is subject to Canadian income tax on his or her worldwide income from all sources in that year. This would include a Canadian resident student earning employment income in Japan. The student is to report the income in Canadian dollars, and where income taxes are paid on that income in Japan, the student may be eligible to claim a foreign tax credit in Canada.

Further information regarding reporting employment income may be found in the General Income Tax and Benefit Guide 2017. Detailed information regarding the foreign tax credit can be found in Folio S5-F2-C1, Foreign Tax Credit.

Additional Information

Canadian resident students studying in Japan may request that the Japanese university they are attending complete a form TL11A, Tuition and Enrolment Certificate – University Outside Canada, which the students require in order to claim a tuition amount on their tax returns. The university can refer to Information Sheet RC190, Information for Educational Institutions Outside Canada, which will help them to understand, fill in and certify the applicable Canadian tuition amounts certificate for students enrolled at that university.

Conclusion

Recipients of a MEXT Scholarship, who earn employment income in Japan, and who are factual residents of Canada, will generally be required to report their income each year for Canadian income tax purposes. This includes the taxable part (if any) of scholarships, fellowships, and bursaries, as well as employment income, even if the student does not receive any income information slips from foreign sources such as a Canadian T4 or T4A slip. Information regarding documents that students need to keep and their income tax obligations can be found in Guide P105, Students and Income Tax as well as in the General Income Tax and Benefit Guide 2017.

We trust our comments are of assistance.

Yours truly,

Sherry E. Thomson, CPA, CGA
Acting Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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