The purpose of this post is to document what I’ve learned about the tax treatment of the Education and Training Benefit available to veterans, in the hopes that it can help others facing a similar situation.
Education and Training Benefit
Since 2018, Veterans Affairs Canada (VAC) has offered the Education and Training Benefit (ETB), which provides veterans with funding to further their education. There are two levels of eligibility based on the number of years served. As of April 2024, veterans with at least 6 years of service are eligible for up to $48,275, or up to $96,550 with 12 years of service. These figures are indexed to inflation.
VAC states in their FAQ for the ETB that veterans will receive a T4 (Statement of Remuneration Paid) for the funding they receive. However, VAC actually issues a T4A (Statement of Pension, Retirement, Annuity, and Other Income). In the T4A statement, ETB payments are reported in box 105 (Scholarships, fellowships, bursaries, and artists’ project grants).
VAC also states in their FAQ that the ETB is a taxable benefit, and CRA notes that income from box 105 of a T4A should be reported on line 13010 of your tax return (Taxable scholarships, fellowships, bursaries, and artists’ project grants). However, the rules to calculate the value to report in line 13010 are somewhat more complex due to what is known as the scholarship exemption.
Scholarship Exemption
The scholarship exemption is codified in sections 56(3) and 56(3.1) of the Income Tax Act, and is further described in CRA’s Income Tax Folio S1-F2-C3 – Scholarships, Research Grants and Other Education Assistance. The amount that can be deducted varies based on the situation.
First, whether or not the recipient of scholarship income is a student, there is a blanket $500 deduction that can be subtracted from the income reported in box 105.
For full-time students, the full amount of scholarship income can be deducted, provided that they are either a “qualifying student,” or are able to deduct the education tax credit in the tax year, the preceding year, or the next year.
For part-time students the same conditions apply, but the amount that can be deducted (beyond the $500 noted above) is limited to the fees paid to the educational institution and the cost of materials related to the program, such as books. Any remaining scholarship income must be reported as taxable income on line 13010. CRA provides a worksheet on their website to assist with this calculation.
The education tax credit is codified in sections 118.5 and 118.6 of the Income Tax Act, which specify the conditions that must be met for a student, educational institution, and program to qualify for the credit. It is further explained in CRA’s Income Tax Folio S1-F2-C2 – Tuition Tax Credit.
Disputes
The scholarship exemption has been the subject of a number of cases before the Tax Court of Canada. In determining whether a claimant met the requirements for a qualifying student, institution, and program, the court has relied on the provisions of the Income Tax Act related to the education tax credit noted above. For example, in the 2010 case of Zhang v The Queen, the court found that a T2202 (Tuition and Enrolment Certificate) from the educational institution was required to claim the scholarship exemption, on the basis that one is required to claim the education tax credit.
One issue with the tax return process is that there is no way to “show your work” when it comes to line 13010. This can result in CRA noting a mismatch between the figure reported in box 105 of the T4A and the reduced figure reported on line 13010. In such a case, CRA may reassess the return and replace the line 13010 figure with the one from the T4A, reduced by the $500 basic exemption amount.
This is the situation I’m currently facing with my 2022 return, which was reassessed in March 2023. I’ve filed a formal dispute with CRA regarding this reassessment, and provided the following documentation along with an explanation of the situation:
- A completed copy of CRA’s worksheet for part-time students
- The ETB acceptance letter from VAC
- The ETB payment schedule from VAC
- The T4A from VAC
- A T2202 showing tuition paid to a Canadian university
- Receipts for materials related to the program
I’ll update this post as things progress.
References
Veterans Affairs Canada – Education and Training Benefit
Canada Revenue Agency
- T4A – Statement of Pension, Retirement, Annuity, and Other Income
- T2202 – Tuition and Enrolment Certificate
- Line 13010 – Taxable scholarships, fellowships, bursaries, and artists’ project grants
- Worksheet – Scholarship Exemption – Part-time enrolment
- Income Tax Folio S1-F2-C2 – Tuition Tax Credit
- Income Tax Folio S1-F2-C3 – Scholarships, Research Grants and Other Education Assistance
Income Tax Act
- Eligible scholarship income, sections 56(1)(n)(i)–(ii)
- Scholarship exemption, sections 56(3)–(3.1)
- Tuition credit, sections 118.5–118.6