2018-0777321I7 Tax treatment of a proposed XXXXXXXXXX program

Principal Issues: 1. Would the benefit received by an individual in the form of an interest-free student loan, under the proposed XXXXXXXXXX program for student loans, be taxable to the recipient? 2. Would an amount, equivalent to the amount of interest paid by the debtor of the student loan, applied to reduce the principal balance of the loan, under the proposed XXXXXXXXXX program for student loans, be taxable to the debtor?

Position: 1. No 2. No.

Reasons: 1. The benefit received by an individual in the form of an interest-free loan, under the proposed XXXXXXXXXX program for student loans, does not appear to be income from a source under the Act and therefore, not required to be included in the income of the recipient. 2. The amount applied to reduce the principal balance of the student loan, under the proposed XXXXXXXXXX program for student loans, does not appear to be income from a source under the Act and therefore, is not required to be included in the income of the debtor.

Author: Brennan, Christopher
Section: 12(1)(x), 56(1)(n), 56(1)(u), 56(1)(r), 56(4.1), 80.4(1), 118.62

                                                                                                                               November 19, 2018

Cornelis Rystenbil, CPA, CGA                                                                               HEADQUARTERS
Provincial Legislative Amendments Section                                                          Income Tax Rulings
Legislative Policy Directorate                                                                                 Directorate
Legislative Policy and Regulatory Affairs Branch                                                   Christopher Brennan
                                                                                                                                (613) 670-0827

                                                                                                                                 2018-077732

Proposed XXXXXXXXXX program for student loans

This memorandum is in reply to your request for our views on the proposed XXXXXXXXXX program for student loans (the proposed program). It is our understanding that the intent of the proposed program is to help reduce the financial burden of student loans by eliminating the interest on the provincial portion of the student loans.

You have identified two separate scenarios that may be offered to individual recipients under the proposed program.

In the first scenario, no interest is calculated or applied to the student loans received by the individuals. Therefore, individuals will not pay any interest on their student loan under the proposed program.

In the second scenario, interest is calculated on the student loan and paid by the individual. Subsequently, an amount of the principal balance of the student loan is forgiven, the forgiven amount calculated to equal the interest paid by the individual.

Based on the limited information provided, there are no conditions that need to be met by an individual to qualify for the proposed program.

You have asked whether the benefit received by individuals, under either scenario of the proposed program, will be taxable to the individual.

Our comments

Paragraph 56(1)(n) of the Income Tax Act (the Act) generally includes in income all amounts, in excess of what may be referred to as the scholarship exemption, received in the year as, or on account of, a scholarship, fellowship, bursary or prize for achievement in a field of endeavour ordinarily carried on by the taxpayer (other than a prescribed prize). Scholarships and bursaries are amounts paid or benefits given to students to enable them to pursue their education. The term bursary is not defined in the Act, however, its meaning is broad enough to encompass almost any form of financial assistance paid to enable a student to pursue his or her education.

If a student receives a genuine loan to assist in financing the student's education, whether forgivable or not, the loan is not considered to be an amount received as or on account of a scholarship, fellowship, or bursary for purposes of paragraph 56(1)(n) the Act. For a genuine loan to exist, there must be a borrower/lender relationship at the time the loan is made and provisions must generally be made for repayment within a reasonable time.

Subsection 80.4(1) of the Act deems an interest benefit to arise where a taxpayer has received a low interest or interest-free loan in connection with a previous, current or intended office or employment. In general terms, the benefit is calculated as the amount of interest the taxpayer would have paid on the loan for the year at the prescribed rate, minus the amount of interest the taxpayer paid on the loan in the year. The amount of the benefit computed under subsection 80.4(1) is included in the taxpayer’s income under subsection 6(9).

Interest-free loan

It is our understanding that the interest-free loans, under the proposed program, are genuine loans given to assist in financing the individual’s education. Moreover, the interest-free loans, under the proposed program, are not in connection with a previous, current or intended office or employment. It is our view that the interest-free loans, under the proposed program, would not likely be considered a scholarship, fellowship, or bursary for purposes of paragraph 56(1)(n) Act, nor would a benefit be required to be computed under subsection 80.4(1) and included in the individual’s income under subsection 6(9). Furthermore, the benefit received by an individual in the form of an interest-free loan, under the proposed program, does not appear to be income from any other source under the Act and therefore would not be required to be included in the income of the individual.

Principal balance forgiven

As stated above, it is our understanding that there are no conditions required to be met by an individual to qualify for the proposed program.  It is our further understanding that the student loans remain interest and payment free while the individual is in study.  Therefore, it is our view that the amount of the principal balance of the student loan forgiven, the forgiven amount calculated to equal the amount of interest paid by the individual on the student loan under the proposed program, would not likely be considered a scholarship, fellowship, or bursary or prize for achievement in a field of endeavour ordinarily carried on by the taxpayer for purposes of paragraph 56(1)(n) Act. Furthermore, the amount of the principal balance of the student loan forgiven under the proposed program, does not appear to be income from any other source under the Act and therefore not required to be included in the income of the individual.

Tax Credit for interest on student loan

Section 118.62 of the Act provides a tax credit to an individual for interest paid on a loan made to, or other amount owed by, an individual under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province providing similar financial assistance to students at post-secondary school level. Forgiven interest and interest accrued but not paid do not qualify for the credit.

We are unable to determine, due to the limited information provided on the proposed program, whether the interest paid by the individual under the second scenario would be eligible for the tax credit under section 118.62 of the Act.

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.

Yours truly,

Lita Krantz, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2019

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2019