13 December 2004 External T.I. 2004-0069601E5 - Tuition fees/Forgivable Loans/Charitable Credit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1.Nature of assistance given to student -forgivable loans vs. scholarship/bursaries and affect on other tax credits/deductions such as childcare deductions and charitable credit....

Position: 1. General discussion only-- whether bona fide loan exists is a question of fact- whether forgivable or not

Reasons: 1. Loan described was more in the nature of assistance/scholarship-bursary; forgivable loan must be forgiven upon meeting certain conditions- financial hardship is more in nature of awarding a scholarship or bursary.

XXXXXXXXXX Lena Holloway
2004-006960
December 13, 2004

Dear XXXXXXXXXX:

Re: Request for Technical Interpretation:

Student Loans/Bursaries
Tuition Tax Credit
Charitable Tax Credit

This is in response to your letter of April 1, 2004, written on behalf of private school administrators with respect to forgivable loans, the tuition tax credit, the child care expense deduction, and the charitable donation tax credit in specific circumstances.

In your letter you note that paragraph 2 of interpretation bulletin IT-340R, Scholarships, Fellowships, Bursaries, and Research Grants - Forgivable Loans, Repayable Awards and Repayable Employment Income, defines a forgivable loan as a loan made to enable the borrower to pursue an education or to carry out a research project, and which the lender is committed to forgive if certain conditions are met. Paragraph 4 goes on to state that a loan, whether forgivable or not, does not come within the terms "scholarship", "fellowship", "bursary" or "research grant" as used in paragraph 56(1)(n) or (o) of the Act. As there are no further published guidelines as to what constitutes a "forgivable loan, you have asked for some comments on what characteristics a forgivable loan must possess.

In addition, you have raised specific questions with respect to the following topics:

1. Tuition Credit when Tuition paid by proceeds from forgivable loan (Section 118.5)

2. Child care Expense Deduction when student receives taxable bursary or parent receives forgivable loan to cover cost of tuition (Section 63)

3. Charitable Donation Credit for Amounts Paid to Religious Schools (Section 118.1).

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to offer the following general comments, which may be of assistance.

Our Comments

Characteristics of a Forgivable Loan

While the concept of "forgivable loan" is contained in several provisions of the Act, (for example, subparagraph 12(1)(x)(iv), subsection 13(7.1), paragraph 66(15)(a.1) and the definition of "government assistance" in subsection 127(9)) "forgivable loan" is not defined in the Act. IT-340R contains the administrative guidelines for dealing with forgivable loans given for educational purposes, and discusses the more commonly encountered situations such as those loans given to employees, prospective employees or shareholders.

Paragraph 16 of IT-75R5, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants state that in order for a genuine loan to exist, provisions must generally be made for repayment within a reasonable time. Paragraph 3 of IT-340R explains that where the agreement under which an amount is paid gives rise at the time of payment to an enforceable debt, it is our view that the amount is a loan. With a forgivable loan, the borrower is legally obligated to repay the loan when the loan is made. However it may cease to be repayable if certain conditions are met by the borrower

On the other hand, where the agreement specifies that the amount paid does not become a debt of the recipient unless the recipient fails to fulfil certain conditions, the amount is generally considered to be a repayable award. A repayable award is a scholarship, fellowship, bursary or research grant, which the recipient is committed to return if certain conditions are not met. A repayable award is intended to be a grant, which may be repayable under certain circumstances. Accordingly, a repayable award received for educational purposes would generally be included in income pursuant to paragraph 56(1)(n) of the Act.

It is our opinion that financial assistance provided to a student (or indirectly to the student's parent) by an educational facility is most likely to be in the form of a scholarship, bursary, fellowship or research grant. This is especially so where the assistance is dependant on the economic needs of the recipient (as opposed to a condition that the student must perform in order to secure the payment). Accordingly, such amounts would generally be included in the student's income pursuant to paragraph 56(1)(n) or 56(1)(o) of the Act. If all, or a portion, of the award has to be repaid in a future year, the repayment may be deductible, in certain circumstances, under paragraph 60(q) of the Act.

We cannot provide definitive comments without considering all of the facts and documentation of a particular assistance program, including the loan agreement, the eligibility requirements for the loan or award, and whether the loan or award is granted as a result of the parent's or student's employment.

Tuition Credit

The tuition tax credit in subsection 118.5(1) of the Act may not be claimed if tuition fees are reimbursed by the taxpayer's employer or the taxpayer is reimbursed by, or receives, assistance from a federal or provincial job training program, unless the reimbursement or assistance is included in the taxpayer's income. Where a bona fide loan is made available to a student to help defray the student's tuition fees, and it is not specifically identified within the exceptions described in subparagraphs 118.5(1)(a)(iii) through (v) of the Act, the amount of the loan would not, in and of itself, reduce the tuition tax credit to which the taxpayer is otherwise entitled. However, as noted above, whether an amount, labelled as a "forgivable loan" is, in fact, a scholarship or bursary (which is included in the recipient's income) is a question of fact that can only be determined after reviewing all of the documentation and circumstances surrounding the payment.

Childcare Expenses

Child care expenses incurred with respect to a child's attendance at a primary or secondary school are only deductible to the extent that the payment is for the provision of child care services (i.e. supervision before and after classes or during the lunch period). Pursuant to paragraph 63(1)(d) of the Act, child care expenses must be reduced by any reimbursement or any other assistance that any taxpayer is entitled to receive in respect of such child care expenses. It is likely that a forgivable loan given to the parents of a child to cover eligible child care expenses would be considered a form of assistance that would reduce the amount that can be claimed as child care expenses. However, no definitive conclusions can be made without reviewing all of the facts and documentation related to the payment.

Charitable Donations

IC75-23 was authored by our Charities Directorate. It is our understanding that they are intending to update it to reflect the decision in Woolner et al v. The Queen (2000 DTC 1956) and proposed changes for split-receipting. We have therefore referred your charitable donation inquiries pertaining to this IC to the Charities Directorate for their reply.

We trust our comments will be of some assistance.

Yours truly,

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate