Students who attend private elementary and secondary schools on a scholarship
will be in for a special tax treat this time next year when filing their 2007
tax returns. Buried in last month's federal budget was a proposed measure that
would fully exempt from tax all scholarships and bursaries provided to students
to attend elementary and secondary schools.
Prior to this change, only the first $500 of such scholarships were
tax-exempt. Post-secondary scholarships were completely exempted in last year's
budget. In extending the exemption to all scholarships, the government stated
that it was honouring its "commitment to student academic excellence and
While welcome for students attending school this year, this change comes
about eight years too late for the Jones family, who took their case to tax
court in 2002.
Tim Jones was 16 in 1999, when he won a scholarship to Upper Canada College
(UCC) in Toronto. The value of the scholarship was $16,000, and it covered
tuition for a UCC day student.
Tim received no actual cash. The tuition charges were applied to his student
account and his account was then credited and offset by the amount of the
UCC sent Tim a T4-A slip for the 1999 tax year indicating "other income" of
$16,000, for the value of his scholarship. Tim objected; he felt that the amount
should not be taxable since he "never had the amount in question in his hands."
An officer from UCC openly acknowledged the problem this phantom income
inclusion could impose on potential scholarship recipients, admitting that "many
good students do not come to UCC because they cannot meet the tax burden imposed
upon them as a result of the scholarship being taxable."
Tim testified that if he had not received the scholarship, he would have gone
to a high school near his home and would not have had to pay for tuition. He
argued that the UCC scholarship "had no monetary value" even though he
presumably enjoyed his time at the college and benefited from its high standards
of academics. "These were purely personal benefits of no pecuniary value," he
The court disagreed and while acknowledging that Tim did not actually receive
the scholarship money himself, the funds were used to pay his own expenses,
namely the tuition fees, which he would have had to pay himself had he not
received the scholarship.
As a result, the court found the scholarship to be taxable. The judge did,
however, offer some guidance to future students: "The proper remedy would be to
attempt to have the legislation changed."
It appears that time has finally come, albeit too late for Tim Jones.
Jamie Golombek, CA, CPA, CFP, CLU, TEP is vice-president, taxation and estate
planning, at AIM Trimark Investments in Toronto.