Student Wins In Court Against Cra And Avoids Tax On Student Loan Forgiveness

Depending on your province of residence, you may be eligible to have some of your student debt forgiven by your provincial government. But is the amount of student debt forgiven considered to be taxable income ? That was the issue before the tax court in a decision released earlier this month involving a Quebec student loan.

Quebec’s Loan Remission Program allows students to reduce their student loan debt by 15 per cent if they studied full time and completed their program within the expected number of terms and years. To be eligible, students must have received a bursary from the Quebec Loans and Bursaries Program for each award year they were studying in the program, and must have completed the program or degree within the prescribed deadline.

The amount of the loan remission is paid to the financial institution that awarded the student loan and is used to repay part of the loan. The student receives a tax slip reporting the amount of the loan forgiven, but according to the Quebec government’s own website, Revenu Québec does not consider the amount of loan remission to be taxable income, at least for Quebec provincial income tax purposes.

It appears, however, that the Canada Revenue Agency does not share the same view, which is why a taxpayer was recently in Tax Court challenging the CRA’s attempt to tax her on the portion of her Quebec student loan that was forgiven.

The taxpayer currently works as a schoolteacher, having completed her university studies in 2021. She makes monthly payments, reducing the balance of her Quebec student loan debt account.

The taxpayer was in court appealing the CRA’s reassessment of her 2023 tax return. She objected to the amount of $5,423 being included in her taxable income, which is the amount the Quebec government remitted to the student’s loan debt account for the 2023 tax year. The taxpayer did not receive this amount personally.

The issue before the court was simply whether the $5,423 remitted by the Quebec government in 2023 to the taxpayer’s Quebec student loan debt account is considered to be taxable income, as reassessed by the CRA.

Under the Income Tax Act , an amount received by the taxpayer “as or on account of a scholarship, fellowship or bursary” is taxable. The CRA’s view was that the 2023 student loan remission amount of $5,423 ought to be taxable as the taxpayer received the debt forgiveness “as or on account of a … bursary”.

While the Tax Act itself does not define the word “bursary,” prior jurisprudence has addressed the meaning of bursary for purposes of this taxing rule. In a 2004 federal court of appeal decision, the court provided several definitions of “bursary.” First, it cited the Concise Oxford English Dictionary (Tenth Edition, Revised, Oxford University Press), which defines “bursary” as “a grant, especially one awarded to a student.” It also cited the New Collegiate Dictionary (Thomas Allen & Son Ltd., Toronto), which defines bursary as “a monetary grant to a needy student.” The judge also cited the Canadian Oxford Paperback Dictionary (Oxford University Press), which defines a bursary as a “financial award to a university student made primarily on the basis of financial need or some other criterion in addition to academic merit.”

As the judge summarized, these definitions of the word bursary highlight that bursaries are grants given to students in need of financial help so as to allow them to continue their studies.

The CRA’s argument was that the $5,423 amount paid by the government toward the student’s loan account in 2023 was taxable, as it should be considered a bursary. But the judge did not accept this.

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As he explained, the remittance cannot be a bursary “for the clear reason that in 2023 the (taxpayer) was not and has not been since 2021 ‘a student in need of financial help so as to allow (her) to continue (her) studies.’” Thus, the amount received wasn’t taxable as a bursary.

Turning to the words of the Income Tax Act, the judge then wondered whether the amount remitted by the government could be taxable as it was “on account of a bursary.” Again, the judge refused to follow this logic as the remission was received on account of a student loan. As the judge remarked, “who would or could plausibly assert that a student loan is a bursary?”

As a result, the judge concluded that since the amount forgiven doesn’t fit within the definition of bursary, the CRA’s attempt to tax it as such was mistaken. The taxpayer won her case, and the remitted amount was to be excluded from her 2023 income.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com .

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