Fellowship taxation Canadian Grad Student in California -

My_question_is: Applicable to both US and Canada
Subject:        Fellowship taxation
Expert:         taxman@centa.com
Date:           Saturday March 24, 2007
Time:           08:40 PM -0500

QUESTION:

Grad student on F1 visa living in California for the last 5 years, received an anuual fellowship from California University and free tuition; will the fellowship income be taxable in California and Canada.  US federal has deducted 14% so I assume no 1040NR is required. However can a 1040 return be filed and no Canadian tax return?

_____________________________________________________________________________________________________
david ingram replies:

In general, a Canadian grad student on an F-1 with US income would be taxable in both countries.  However, if the grad student has taken out US medical, has a US driver's licence, US registered car and has generally gone American, and intends to figure out how to remain in the US, filing a  1040 as a resident would likely be correct and no Canadian return would be required.  If however, the student has maintained a Canadian driver's licence, Canadian medical and has his or her car registered in Canada, a Canadian return would be required.

However,

For 2006, Fellowships, scholarships and free tuition have become tax free in Canada if you are attending courses at a recognized University or College or other Post secondary educational institution such as a trade or technical school provided the school issues a T2200 with full time or part time months of attendance shown. You also get to generate a schedule 11 carryforward tuition books and education amount credit by filling in schedule 11 and the provincial form for your  province.

For 2005 and prior years in Canada, $3,000 was not taxable but you also got, get to calculate a generally large credit for tuition and education amounts. (no textbook credit)

The following US rules come from http://www.irs.gov/individuals/students/article/0,,id=96674,00.html - Note that any amount used for board and room or car expenses or travel is taxable.

Taxable Scholarships and Fellowships

If you received a scholarship or fellowship, all or part of it may be taxable, even if you did not receive a Form W-2. Generally, the entire amount is taxable if you are not a candidate for a degree.

If you are a candidate for a degree, you generally can exclude from income that part of the grant used for:

  • Tuition and fees required for enrollment or attendance, or
  • Fees, books, supplies, and equipment required for your courses.

You cannot exclude from income any part of the grant used for other purposes, such as room and board.

A scholarship generally is an amount paid for the benefit of a student at an educational institution to aid in the pursuit of studies. The student may be in either a graduate or an undergraduate program.

A fellowship grant generally is an amount paid for the benefit of an individual to aid in the pursuit of study or research.

Example 1
Tammy Graves receives a $6,000 fellowship grant that is not designated for any specific use. Tammy is a degree candidate. She spends $5,500 for tuition and $500 for her personal expenses. Tammy is required to include $500 in income.

Example 2
Ursula Harris, a degree candidate, receives a $2,000 scholarship, with $1,000 specifically designated for tuition and $1,000 specifically designated for living expenses. Her tuition is $1,600. She may exclude $1,000 from income, but the other $1,000 designated for living expenses is taxable and must be included in income.

Payment for Services
All payments you receive for past, present, or future services must be included in income. This is true even if the services are a condition of receiving the grant or are required of all candidates for the degree.

Example
Gary Thomas receives a scholarship of $2,500 for the spring semester. As a condition of receiving the scholarship, he must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for his services. Gary is a degree candidate, and his tuition is $1,600. He can exclude $1,500 from income as a qualified scholarship. The remaining $1,000, representing payment for his services, is taxable.

Fulbright Students and Researchers
A Fulbright grant is generally treated as any other scholarship or fellowship in figuring how much of the grant can be excluded. If you receive a Fulbright grant for lecturing or teaching, it is payment for services and subject to tax.

Pell Grants, Supplemental Educational Opportunity Grants, and Grants to States for State Student Incentives. These grants are nontaxable scholarships to the extent used for tuition and course-related expenses during the grant period.

Reduced Tuition
You may be entitled to reduced tuition because you or one of your parents is or was an employee of the school. If so, the amount of the reduction is not taxable so long as the tuition is for education below the graduate level. (But see Graduate student exception, next.) The reduced tuition program must not favor any highly paid employee. The reduced tuition is taxable if it represents payment for your services.

Graduate Student Exception
Tax-free treatment of reduced tuition can also apply to a graduate student who performs teaching or research activities at an educational institution. The qualified tuition reduction must be for education furnished by that institution and not represent payment for services.

Contest prizes
Scholarship prizes won in a contest are not scholarships or fellowships if you do not have to use the prizes for your education. If you can use the prize for any purpose, the entire amount is taxable.

Qualified State Tuition Program
If you receive distributions from a qualified state tuition program, only the amount that is more than the amount contributed to the program is taxable. Part of the benefits may qualify as a nontaxable scholarship or fellowship (for example, matching-grant amounts paid under the program to a degree candidate). Other benefits are partly a nontaxable return of the contributions made to the program on your behalf (for example, by your parents). You must include in your income the part of the benefits that is neither a nontaxable scholarship or fellowship nor a return of contributions. For more information about qualified state tuition programs, see Publication 525 , Taxable and Nontaxable Income, but for more information on a specific program, contact the state or agency that established and maintains it.

Other Grants or Assistance
If you are not sure whether your grant qualifies as a scholarship or fellowship, ask the person who made the grant.

Additional information
See Publication 970,  Tax Benefits for Education, for more information on how much of your scholarship or fellowship is taxable.

How To Report

If you file Form 1040EZ, include the taxable amount of your scholarship or fellowship on line 1. Print "SCH" and any taxable amount not reported on a W-2 form in the space to the right of the words "W-2 form(s)" on line 1.

If you file Form 1040A or Form 1040, include the taxable amount on line 7. Print "SCH" and any taxable amount not reported on a W-2 form in the space to the left of line 7 on Form 1040A or on the dotted line next to line 7 on Form 1040.

Other Income

If you are not sure whether to include any item of income on your return, see Publication 525 .

david ingram wrote:
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Disclaimer:  This question has been answered without detailed information or consultation and is to be regarded only as general comment.   Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation  in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
 
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Phone consultations are $400 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or a phone consultation is in Canada.
 
This is not intended to be definitive but in general I am quoting $800 to $2,800 for a dual country tax return.
 
$800 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,000 would be the same with one rental
 
$1,200 would be the same with one business no rental
 
$1,200 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,500 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,600 would be for two people with income from two countries

$2,800 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $150.00 up.
 
With a Rental for $350
 
A Business for $350 - Rental and business likely $450
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $800 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.
 
Just a guideline not etched in stone. 
 
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