Free tuition doesn't mean free from taxes

National Post

2010-09-11


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.

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.

To get the funds, the student or resident must sign a contract agreeing to practice in an underserviced or undersupplied community and must also secure his or her own position within that community. 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.

Under the Income Tax Act, beginning in 2006, most scholarships, fellowships or bursaries are completely 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.”

Perhaps not surprisingly, the CRA felt that while the amount that the medical student received was linked to the amount of tuition he paid, it cannot be considered to have been received to “enable” him to pursue his or her education. Rather, it appears that the amount was received as an encouragement to practise in an underserviced or undersupplied community.

As a result, 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 conclusion 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, even if the cost of his tuition is fully recovered through the Free Tuition program.

Ultimately, the CRA states that it’s the Department of Finance that’s responsible for developing and evaluating federal tax policy and consequently, “we are unable to comment with respect to whether it is appropriate for medical residents to be taxed on [these] grants.”

Sometimes “free” isn’t always free.