A recently published CRA memorandum, which despite redactions, appears to refer to a proposed financing scheme at the provincial level will be some substantial interest to secondary educational institutions and may open the door to some private or charitable planning.[1] It has been edited to try to make it somewhat clearer.
“This memorandum is in reply to your request for our views on the proposed program for student loans. 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 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. (our emphasis.)
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.”
There is nothing in this document which we
think is inaccurate and the rulings (so to speak) are as good as one gets from
the CRA. For the imaginative planner, this may be a guide to creating a scheme
to help students even if a government is not involved. Non-Profits and
charities which have student aid as an object might want to take note.
[1] 2018-0777321I7
By: Arthur Drache