CRA Always on the lookout to grab taxes where you least expect it

This article by Jamie Golombek, shows how CRA can create tax problems for students. What a nice way to introduce our young people to our government. Read on,

Dan White

Read more at www.taxauditsolutions.ca

Free tuition doesn’t mean free from taxes

By Jamie Golombekt, Financial Post September 11, 2010

With students now firmly ensconced in their studies, the issue of how to pay for that education is top of mind, both for students and their parents, who may be footing the bill.

A technical interpretation released by the Canada Revenue Agency last week was in response to a question posed by a parent alarmed that her son was assessed and taxed on the free tuition assistance he received, finding it to be “either incorrect or inappropriate.”

Her son received an amount under the Ontario Ministry of Health and Long-Term Care’s “Free Tuition Program for Physicians.” This program offers medical students in their final year, medical residents and newly graduated physicians grants equal to the medical school tuition paid, up to a maximum amount, in exchange for agreeing to work full-time in an underserviced or undersupplied community upon graduation for three or four years. Failure to live up to the terms of the agreement can result not only in the return of monies received, plus interest, but an administration fee of $5,000.

If the medical school tuition costs do not reach the maximum grant allowable, an additional amount, known as the Location Incentive Fund Grant, is available to bridge the difference between the main program grant and the maximum amount.

Under the Income Tax Act, beginning in 2006, most scholarships, fellowships or bursaries are tax-free. CRA defines scholarships and bursaries as “amounts paid or benefits given to students to enable them to pursue their education …. Normally, a student is not expected to do specific work for the payer in exchange for a scholarship or bursary.”

The CRA felt that the amount that the medical student received cannot be considered to have been received to “enable” him to pursue his education. Rather, the amount was received as an encouragement to practice in an underserviced or undersupplied community.

The CRA concluded that the amount received does not qualify as a scholarship, fellowship or bursary and is therefore fully taxable, either as employment income or as government assistance.

This is further supported by the fact that a top-up Location Incentive Fund Grant is available to the student to ensure that he still gets the maximum amount allowable.

Sometimes “free” isn’t always free.

jamie.golombek@cibc.com

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