Introduction
As a college or university student, receiving a scholarship can help significantly with the costs of higher education. However, many students understandably wonder – is scholarship money taxable income in Canada that needs to be reported to the Canada Revenue Agency (CRA)?
This is an important question to have a clear understanding of.
Key Factors in Determining if a Scholarship is Taxable
There are three main factors that the CRA considers when determining if a scholarship must be included as taxable income or not:
1. Purpose of the Award
Scholarships granted to students for the purpose of education are generally not taxable. This includes amounts given to pay for tuition fees, books, supplies, travel costs, and living expenses.
However, scholarships awarded based on achievement, such as for academic merit, are usually considered taxable income by the CRA. The key distinction is whether the primary purpose is education or recognition of achievement.
2. Requirements or Conditions
Scholarships with no requirements after being awarded, such as continuing studies or maintaining a certain GPA, are usually non-taxable. However, awards that come with stipulations may be fully or partially taxable, depending on the specific conditions.
For example, if a scholarship requires the recipient to work for the grantor after graduation, it could be taxable employment income rather than a non-taxable educational award.
3. Status of Grantor
Scholarships and bursaries granted by qualified educational institutions are generally non-taxable. This includes post-secondary schools, as well as registered charities, and certain other organizations.
Awards from private individuals, families, employers, or other non-qualified sources could be considered taxable income, depending on the specific circumstances and any requirements.
With these three factors in mind, let’s examine some common scholarship scenarios in more detail.
Common Types of Scholarships in Canada
There are several different types of scholarships in Canada. Understanding how each is typically treated by the CRA can help recipients and students determine tax obligations.
Tuition Scholarships
Scholarships that are awarded specifically to cover tuition fees are generally not taxable. This applies whether the funds go directly to the school or are paid to the student.
As the purpose is education, not achievement recognition, tuition scholarships fall under the non-taxable category according to CRA guidelines.
Academic Merit Scholarships
Scholarships granted based on academic performance or school involvement, like volunteer hours, are usually considered taxable income.
However, the first $500 of scholarship money received in a calendar year is tax-exempt. Any amount above $500 would need to be reported as taxable income on your annual return.
Athletic Scholarships
Athletic scholarships that are awarded primarily for participation on a school sports team, not achievement, are typically non-taxable.
However, portions of athletic awards that could be seen more as compensation, such as a salary or signing bonus, may be partially taxable, depending on the details.
Research Scholarships
Grants given for a student to conduct academic research are usually non-taxable if no deliverables are required upon completion.
However, a research scholarship that expects a published paper, invention, or other work product from the recipient could be partially taxable as employment income rather than an educational award.
Need-Based Scholarships
Financial need-based awards are typically not taxable, as the purpose is to assist with educational costs rather than recognize achievement.
Like tuition scholarships, need-based bursaries granted by a school, charity, or government agency tend to fall under CRA’s non-taxable classification.
This covers some of the major scholarship categories according to tax treatment. However, there are also exceptions and special situations to be aware of.
Notable Exceptions and Considerations
While the general guidelines provide clarity in many standard cases, the tax status of scholarships can depend heavily on unique conditions or situations. Here are a few exceptions worth highlighting:
Payments for Services
If a scholarship requires the recipient to perform any services, duties, or work for the grantor in return, it could potentially be seen as taxable compensation rather than non-taxable financial aid.
This applies whether the services are during or after the period of study. Any payment for employment is taxable income.
Foreign Scholarships
Scholarship money received from an international foundation, government agency, or educational institution located outside of Canada may be partially or fully taxable.
However, recipients have a non-taxable exemption on the first $10,000 annually from foreign scholarships or fellowships intended for full-time studies.
Part-time Students
Scholarships awarded to part-time students or those not enrolled in a designated educational program are usually considered taxable income, unlike awards for full-time studies.
This is because part-time awards may be more for recognition of past performance than current education costs.
Mature Students
Scholarships received by mature students who have been out of secondary school for more than six months are typically non-taxable as long as they meet eligibility criteria as full-time post-secondary students.
However, awards to mature students for work or achievement prior to current studies may be taxable rather than financial aid.
It’s clear from the exceptions that scholarship tax treatment remains a nuanced area depending on individual facts. In borderline cases, recipients should contact the CRA directly for a clear ruling on obligations.
Now that we’ve covered the main factors, types of awards, and special considerations, let’s move to some frequently asked questions about scholarship taxation.
FAQ 1 – Do I Need to Report Scholarships on my Tax Return?
In summary – it depends on the specific award, but in many instances at least a portion of a scholarship does need to be reported as taxable income on annual tax returns filed with the CRA.
Only scholarships that are non-taxable, according to CRA guidelines, can be excluded entirely from income reporting. This means tuition fees, books, supplies, and living allowance amounts from qualified sources.
However, portions of merit, service, research, or other awards above the $500 exemption limit would usually require disclosure. Tax slips like a T4A are supposed to be provided by the grantor, but not always.
If in doubt, it’s best to proactively disclose all scholarships received each year to avoid potential issues down the line from the CRA. Omitting taxable amounts could result in penalties and interest on unpaid taxes if discovered in an audit.
FAQ 2 – How Do Scholarships Affect Canada Student Loan Eligibility?
Most scholarship income does not impact Canada Student Loan and grant eligibility in the same year it is received.
Only taxable scholarship amounts that exceed $3,000 for a study period would be included as income and potentially reduce the amount of financial aid available, such as loans and non-repayable grants.
While non-taxable scholarship money does not affect financial need assessment, applicants must still report all awards received to Service Canada. Failing to fully disclose could jeopardize future student aid eligibility.
In general, the majority of scholarships do not meaningfully influence Canada Student Loan amounts due to the exclusions and thresholds in place. However, full and honest reporting is always advised to prevent possible penalties.
FAQ 3 – What Are the Tax Implications of Forgoing a Scholarship?
If a scholarship is declined or not fully used by the expiration deadline, recipients may face tax implications depending on the specific offer.
Primarily, declined or unused portions of taxable merit-based scholarships should be reported as income in the tax year they were awarded, not when potentially reclaimed later on after studies complete.
Meanwhile, relinquished portions of non-taxable need or tuition scholarships would not result in tax consequences since they were not considered income when initially granted.
However, reclaiming scholarship money years after it was offered could potentially make the amounts taxable at that future date, as circumstances may have changed.
It’s always recommended to consult a tax professional if declining or deferring a scholarship to understand reporting obligations and avoid surprises down the road.
FAQ 4 – What Should I Do if My Scholarship Information is Incorrect on a T4A?
Scholarship recipients should carefully review their T4A slips each year against their personal records to ensure that grantor-provided figures like income amounts and exemption boxes are accurate.
Common errors may occur with T4A numbers or calculations when tuition fees are involved. Reporting the wrong information on tax returns risks future compliance issues.
While the CRA may accept tax returns filed without a T4A or with incorrect T4A data, it is always better to voluntarily disclose errors or omissions to the CRA. Not doing so could result in the CRA later determining the return was filed incorrectly, which may trigger penalties and reassessment. Therefore, if there is an error on the T4A, be proactive and work with the scholarship grantor and CRA to issue an adjusted slip or corrected return as needed. Taking these steps helps ensure continued tax compliance on scholarship matters going forward.
