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Educational scholarship and Canadian registered charities – not always as simple as it seems

Educational scholarships have been around probably for as long as there have been educational institutions.  In this note, we are not discussing all scholarships, only educational scholarships given by Canadian registered charities.   CRA has specific requirements for educational scholarships, and some registered charities may not be aware of or complying with those requirements.

 

CRA has a guidance “Advancement of education and charitable registration“.  If your charity is dealing with scholarships, you should probably read the whole guidance, but here is an excerpt specifically dealing with scholarships:

 

Scholarships, bursaries, prizes, and financial assistance for students

  1. The establishment and maintenance of a scholarship,Footnote39 bursary,Footnote40 or prizeFootnote41 may be a charitable purpose under the advancement of education, if the funds advance education and provide a public benefit.
  2. Scholarships or bursaries cover expenses connected with training that provides knowledge or develops abilities, as well as research.Footnote42 This includes tuition and associated expenses,Footnote43 such as room and board, travel expenses, books and school supplies. Prizes reward, and therefore encourage, educational achievement.Footnote44
Restrictions on beneficiary group
  1. To meet the public benefit test for purposes that advance education, the beneficiary group should be clearly identifiedFootnote45 and not unjustifiably restricted.
  2. Generally, this means the beneficiary group must be sufficiently open in nature to show a true objective of benefiting the public.Footnote46 However, it is acceptable if the opportunity to benefit is available to a large enough group, but by its nature it can only help one or a few at a time. For example, a single annual scholarship open to all students at a school or scholarships for students studying a particular subject at a school, is acceptable.Footnote47
  3. Beneficiaries may be restricted by eligibility criteria (who is eligible to apply) or by selection criteria (how beneficiaries will be selected from among those who apply).
  4. The beneficiary group cannot be restricted to named individuals.Footnote48 Also, the beneficiary group cannot be restricted to those who have a personal connection with one or more persons or entities,Footnote49 such as a person’s relatives,Footnote50 employees of a certain company,Footnote51 or members of a certain organization,Footnote52 regardless of the size of the group.Footnote53
  5. However, beneficiaries may be restricted:
    • to employees or dependents of employees in an industry or profession as a whole,Footnote54 because members of an industry or profession do not involve a personal connection
    • if the restriction has been recognized by the courts. Historically, this included students attending a particular school or university,Footnote55 students sharing a common nationality or ethnic origin,Footnote56 sex,Footnote57 disability,Footnote58 or religion,Footnote59 or the inhabitants of a sizable geographic area, such as a town or village.Footnote60 Some of these restrictions may no longer be acceptable, as discussed in paragraph 59, below
    • if the restriction is shown to be linked or relevant to achieving a charitable purposeFootnote61 (for example, a scholarship to attend a school for the hearing impaired may be restricted to persons with hearing impairment)
    • if a personal connection has been identified as a preference, rather than an obligationFootnote62 (for example, a scholarship offered to students of a school, with a statement that in selecting recipients, preference may be given to relatives of an individual or employees of a company)
  6. Organizations that seek to restrict beneficiaries must always ensure the restrictions are not illegal or contrary to Canadian public policy. Restrictions that may be contrary to public policy often involve a prohibited ground of discrimination specified in the Canadian Charter of Rights and Freedoms or federal or provincial human rights legislation. Restrictions the courts have sometimes found to be discriminatory, and therefore contrary to public policy, are generally based on notions of racism, sexism or religious superiority.Footnote63 When considering restrictions on beneficiaries for purposes that advance education, recent court decisions in this area should be examined.
Selection of beneficiaries
  1. An organization should establish a process to select recipients. Scholarships and bursaries may be awarded based on factors relevant to the educational purpose such as scholastic achievement, demonstrated ability, financial need, or a combination of these. They may also be awarded based on achievement in sport or other activities that are connected with, or part of, a school curriculum or program that advances education.
  2. There is no poverty requirement for a purpose that advances education.Footnote64 Therefore, beneficiaries do not have to demonstrate financial need to be eligible (unless it has been specifically included as a selection criterion).
Information to enable assessment
  1. Organizations that provide scholarships, bursaries, or prizes must ensure the public benefit test is met. They should therefore maintain and be able to provide the following information:
    • the nature of the scholarship, bursary, or prize
    • the eligibility and selection criteria
    • how and where the awards are advertised
    • the process used to select beneficiaries (including whether an application form is required, who is on the selection committee and why they were selected, and whether the organization is represented on the committee)
    • the amounts that are awarded
    • how the funds are distributed (to the student or to the educational institution). If funds are provided in stages based on continuing eligibility (such as by attending a school or maintaining certain grades), information on monitoring ongoing eligibility should be included
Examples

Examples of purposes that advance education by providing scholarships, bursaries, or prizes to students:

  • To advance education by providing science fair awards to middle school students to encourage academic excellence.

  • To advance education by providing bursaries and other financial assistance to students attending (specify) university.

  • To advance education by providing scholarships to students from (specify) school to be used for post-secondary education.

We recently reviewed a letter from CRA dealing with a charity application that contained a scholarship.  CRA wanted more information:
Scholarships, bursaries, awards, prizes, and student loans are usually charitable under advancement of education. To make sure the necessary element of public benefit is met, please send us the answers to the following questions, along with a copy of the scholarship application, for our file:
-What is the applicant’s eligibility based on? Any restrictions?
-Who is making the preliminary and the final selections?
-How will the scholarships be disbursed?
-What type of assistance is provided? In what monetary amount?
-How will the scholarships be advertised and where?
Additionally, we need detailed information about what are the other forms of financial assistance the organization will provide, and how the organization will confirm that the recipients will be using that for the organization’s intended purposes.
We remind you that when registered charities advance education through the provision of scholarships, they must make sure that:
-a significant part of the population has the chance to apply for the scholarship programs, to meet the public benefit requirements;
-the selection committee is impartial, and major donors to a scholarship do not have influence on the selection committee;
-the final approval of the successful recipients rests with the board of directors of the charity so it ensures control of the charity’s resources; and
-the charity can demonstrate that the scholarship funds are used toward the recipients’ education. In most cases, a scholarship fund set up to assist any of the following will not qualify as charitable:
-a named individual or individuals
-employees of a company
-relatives
-members of a private club, a trade union, or a cooperative
A scholarship can be limited to groups such as students of a school, women, and people of specific ethnic backgrounds.
[Update March 19, 2025- We recently received another CRA letter which discussed scholarships
We have reviewed the additional information provided regarding purpose [#], and we note that the scholarship recipients are restricted only to the participants of the organization’s club programs. Under the advancement of education, the beneficiary group cannot be restricted to members of a certain organization. Please be advised that purpose 4 and related activities may be acceptable if the organization selects its scholarship recipients based on factors relevant to the educational purpose, such as scholastic achievement, demonstrated ability, financial need, or a combination of these. Additionally, recipients may be selected based on achievements in sports or other activities that are connected with, or part of, a school curriculum or program that advances education. ]
This topic was recently dealt with in a FCA decision:
[9] First, we see no palpable and overriding error in the finding that Sigma Chi has provided private benefits to its members through its inhouse scholarships. While Sigma Chi submits that these scholarships are open to all male university students eligible to apply for Sigma Chi membership, they are ultimately payable only to recipients who are accepted as members or pledges. Moreover, despite Sigma Chi’s commitment in the compliance agreement to “devote all of its resources to charitable activities” and to not restrict the beneficiaries of the scholarships and educational assistance program, the record shows that it continued to grant inhouse scholarships in 2015, 2016, 2020, and 2021. In 2015 and 2016 respectively, 75% and 82% of Sigma Chi’s scholarship funds were restricted to Sigma Chi members and pledges. In 2020 and 2021, Sigma Chi awarded $216,760 in inhouse scholarships. The Minister also points out that, at the time of its registration, Sigma Chi’s stated purpose of assisting students pursuing higher education made no mention of any restriction to members or pledges. But as recently as May 2023, Sigma Chi stated on its website that “[t]he Foundation exists as a vehicle for local Active Chapters, Alumni Chapters and/or House Corporations to raise tax-deductible funds for educational purposes—primarily for the benefit of Active Chapters and Active brothers” (emphasis added). This is not a charitable purpose under the ITA.
So points to remember:
1) There are many requirements for educational scholarships.  It is not just good enough to comply with the points raised above but it is important that the charity has books and records showing compliance.
2) If you want to do educational scholarships that are not going to be compliant with these rules, then you or your charity may wish to set up a separate nonprofit organization that can provide scholarships that do not meet these rules. Keep in mind that the charity itself cannot provide the non-profit with funds for those scholarships, but the non-profit can obtain funds through other means such as business sponsorship, government grants, or fundraising. The separate nonprofit will not be able to issue an official donation receipt.
3) CRA refers to case law dealing with some restrictions that have been accepted by the courts. It is important to realize, especially with long-term scholarships that will go on for decades, that the caselaw does change, and therefore, the scholarship that today may be appropriate, looking back at historical case law, may not be accepted in 10 or 20 years. That is why the CRA may have used the term “historically”.
4) Some educational scholarships are provided from unrestricted funds of a charity.  Some come from restricted funds that may have requirements that are not appropriate for a registered charity.  Whenever agreeing to a restriction, whether for scholarships or other activities, be very careful about the restrictions your charity will accept and as the world is sometimes changing very quickly, have amendment clauses, cy pres clauses, secondary purpose clauses, etc., in gift agreements and websites to ensure that you are not left with funds that cannot be spent or can only be spent after an expensive court application.

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