Navigating the Tax Implications of Scholarships in Canada
Understanding the tax implications of scholarships, awards, bursaries, and fellowships in Canada can be complex. These funds, intended to enable students to pursue their education, are subject to specific rules under the Income Tax Act (ITA). This article aims to clarify these rules, providing guidance for students and those who support them.
Scholarships and the Income Tax Act
Scholarships are effectively amounts received by a taxpayer in a given year for scholastic pursuits. According to subsection 56(1)(n) of the ITA, the amount of scholarships received that exceeds the scholarship exemption for the year must be included in "Other Income" when calculating Net Income for Tax Purposes.
Defining Key Terms
Understanding the taxability of scholarships requires clarity around key terms such as ‘full-time student,’ ‘qualifying educational program,’ and ‘designated educational institution.’ These definitions determine eligibility for certain exemptions and credits.
General Rules Regarding Taxability
As a student in Canada, you are generally subject to the same rules regarding income, tax deductions, and tax credits as any other taxpayer. This means that most income you receive, including employment income from full or part-time jobs, tips, occasional earnings, and investment income, is taxable. However, specific exemptions apply to scholarships.
Elementary and secondary school scholarships and bursaries are non-taxable. For post-secondary programs, the taxability depends on several factors, including whether the student is full-time or part-time and the nature of the program.
Read also: Camp Scholarships Guide
Full-Time vs. Part-Time Students
If you are considered a full-time qualifying student, scholarships, fellowships, and bursaries received are not taxable up to the total amount required to support you in the program. This exemption is crucial for full-time students relying on financial aid.
Qualifying Educational Programs
A post-secondary program that consists mainly of research is eligible for the scholarship exemption only if it leads to a college or CEGEP diploma, or a bachelor's, master's, or doctoral degree (or an equivalent degree). This distinction is important for graduate students and those in research-intensive programs.
Scholarships vs. Employment Income
One of the critical distinctions lies in differentiating between a scholarship and employment income. If a student receives financial assistance as a condition of employment, such as teaching, marking papers, or conducting research as a member of the university staff, the tax implications differ.
According to paragraphs 3.25 to 3.32, an amount paid to facilitate the advancement of a person's education may be considered employment income if an employer-employee relationship exists between the recipient and the grantor. This is especially true if the recipient undertakes training, studies, and research ordinarily expected under the terms of their employment.
In such cases, the payer's degree of control over the worker's daily activities and influence over the worker are key factors in determining whether an employment relationship exists. If the university has not provided separate payments for the fellowship and employment components, the whole amount paid to the student would technically be employment income.
Read also: Benefits of NSHSS Scholarships
However, if this results in a rate of pay considerably higher than the going rate for similar services, the student is only required to include the amount equal to what the university would have paid for similar services rendered by a person not receiving a fellowship.
Registered Education Savings Plans (RESPs)
When money is withdrawn from a Registered Education Savings Plan (RESP) to be used for educational costs, its taxability depends on whether it is a withdrawal of a contribution amount or a non-contribution amount. The contribution amount is the sum of all contributions made to the account over the years and is not taxable. Non-contribution amounts, also referred to as educational assistance payments (EAPs), are taxable in the year they are paid.
Tax Deductions and Credits for Students
Students can take advantage of several tax deductions and credits to reduce their tax burden. These include:
Moving Expenses
All moving expenses incurred to attend university or start employment within or outside Canada are deductible against employment, self-employment, or research grant income from the new location if the move is at least 40km from the current location. Students can claim moving expenses for each move, but the expenses cannot exceed income from the new location. Excess moving expenses may be carried forward to the following year.
Eligible expenses include direct expenses such as travel (including gas, meals, and lodging), lease cancellation charges, and costs of selling or purchasing a home.
Read also: Scholarship Guide
Child Care Expenses
Generally, only the spouse with the lower net income can claim these expenses.
Tuition Fees
A tax credit is available to students for their qualifying tuition fees. To support this credit, you must obtain a completed form T2202A or TL11 from your educational institution. Eligible tuition fees include library fees, lab fees, examination fees, and computer fees paid for courses taken during the year.
Any unused tuition amounts are transferable to a supporting spouse, parent, or grandparent, up to a maximum of $5,000 per person. The student must complete the designation on Form T2202 / TL11 to transfer unused amounts to a supporting person. Tuition credits that cannot be used or transferred in the current year can be carried forward and claimed by the student in a subsequent year.
Student Loan Interest
You may be eligible for a tax credit for the interest you pay on federal and provincial student loans (not private lender loans). This interest cannot be transferred to another person and can be carried forward for five years.
Property Tax Credits
The provinces of Ontario and Manitoba provide refundable property tax credits on rent or property taxes paid in the year for residents of the province on December 31. Quebec provides a property tax refund under similar circumstances.
Strategies for Minimizing Taxes
During your pursuit of higher education, ensure you take advantage of the tax breaks available to students. Here are some strategies to consider:
Complete Form TD1: In years when you expect your personal credits (e.g., basic, tuition) to offset personal tax on income earned, complete form TD1 so the employer will not withhold tax. This may arise in taxation years where you are in school for eight months and working for only four months.
Timing and Nature of RESP Withdrawals: Consider the timing and nature of withdrawals from your RESP. Withdraw as much of the taxable (non-contribution) portion of your RESP as you can tax-free. For example, maximize withdrawals of the taxable portion of your RESP in a low-income year.
Examples
Basant Motors Scholarship: Basant Motors, an auto dealership in Surrey, provides a scholarship of $1,400 annually to two students in the region. The taxability of this scholarship would depend on whether the recipients are full-time students in qualifying educational programs.
Jagdeep Singh: Jagdeep is a part-time student pursuing a diploma in Ecological Restoration at Kwantlen Polytechnic University. As a part-time student, the taxability of Jagdeep's scholarships would be subject to different rules than those for full-time students.
Bobinpreet: Bobinpreet is a full-time student taking an accounting degree at Kwantlen. Being a full-time student in a qualifying program at a designated educational institution, Bobinpreet's scholarships would likely be non-taxable up to the amount required to support him in the program.
Common Misconceptions
It's a common misconception that Box 105 on the T4A slip is categorically not taxable, even if you are a full-time student. The taxability depends on the terms and conditions applied to the award and whether it is considered a scholarship or employment income by the CRA.
tags: #are #scholarships #taxable #in #canada
