Award caused a HEAP of trouble
As students begin to head back to school this week, they can take comfort in recent tax law changes which fully exempt all scholarships from tax.
The first change dates back to 2006, when post-secondary scholarships were entirely exempted from tax. Prior to that, only the first $3,000 was tax exempt. The other change happened in last year's federal budget when the government extended this exemption to elementary and secondary school scholarships as well.
While you would think this would settle the issue, deeming all scholarships to be completely tax-free, an interesting case before the courts has the tax man challenging what otherwise would seem to be a tax-free scholarship.
The case dates back to 2004 when Andrew DiMaria, a third-year engineering student at the University of Waterloo, received a $3,000 award from Dow's Higher Education Award Program (HEAP) to help him pay for his tuition. Andrew is the 21-year-old son of John DiMaria, a senior tax specialist with Dow Chemical Canada Inc., which sponsors the HEAP.
HEAP was established for the purpose of "recognizing the scholastic achievement of children of eligible employees, which includes retired, expatriated and deceased employees, and to provide financial assistance as a means of encouraging them to undertake post-secondary education."
The HEAP covers an employee's children's tuition up to a maximum of $3,000 for post-secondary education each year and is available to a maximum of 100 students per year.
To qualify, the student must be a dependant child of a Dow employee, must attend an approved university, college or institute and must have at least a 70% average when graduating from high school.
The Canada Revenue Agency (CRA) included the $3,000 in John's income on the basis that the award was a taxable benefit from his employment at Dow.
John disagreed and appealed to the Tax Court, submitting that the HEAP award ought to be properly classified as scholarship income to his son, Andrew, and thus should be tax-free under the Income Tax Act. The case was heard last November before Justice Eugene P. Rossiter, who was appointed to the Tax Court in 2006 and last month was named the Court's Associate Chief Justice.
Justice Rossiter, after undertaking a thorough legal analysis, concluded that the HEAP award was not an employment benefit received or enjoyed by John DiMaria for several reasons.
First of all, John was not "enriched by $3,000" since the payment was made directly to his son Andrew and John had no legal obligation to either support his 21-year-old son nor to pay for his post-secondary education. He also had no right to recover the $3,000 from Andrew.
Judge Rossiter concluded, therefore, that the only person who was economically enriched was Andrew. He was attending the school and he was benefitting from the reduced cost of education.
The judge found that the $3,000 was scholarship income and therefore not taxable to John as an employment benefit nor taxable to Andrew since it fell within the $3,000 limit in force since 2004. The CRA has appealed the case to the Federal Court of Appeal. While various documents and affidavits have been filed so far, no trial date has yet been set.