17 May 1999 External T.I. 9908125 - EMPLOYER-PAID EDUCATION COSTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

(1) Would payments made to, or on behalf of an employee for tuition fees be a taxable benefit to the employee?

(2) Would payments made to, or on behalf of an employee for books and related supplies be a taxable benefit to the employee?

(3) Is there a relevant maximum or minimum amount for (1) or (2)?

(4) Please cite the relevant authority under the Income Tax Act &/or Regulations which pertain to (1) or (2).

Position:

(1) & (2): It depends on whether the employer or employee receives the primary benefit.

(3) No.

(4) 6(1)(a) of the Act.

Reasons:

(1) & (2): Not if primarily for the benefit of the employer

(3) No limits are specified but general principle of reasonableness applies.

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XXXXXXXXXX 	990812-5
		David Shugar
Attention: XXXXXXXXXX 

May 17, 1999

Dear XXXXXXXXXX

Re: Provision of Benefits for Employees

This is in response to your fax of March 25, 1999, requesting our opinion concerning the tax consequences of employer-paid educational costs. You state that you are considering the provision of benefits to your employees. One benefit you are considering is the provision of funding for educational purposes, including tuition, books, and related supplies.

Your questions are as follows:

(1) Would payments made to, or on behalf of, an employee for tuition fees be a taxable benefit to the employee?

(2) Would payments made to, or on behalf of, an employee for books and related supplies be a taxable benefit to the employee?

(3) Is there a relevant maximum or minimum amount for (1) or (2)?

(4) Please cite the relevant authority under the Income Tax Act &/or Regulations which pertain to (1) or (2).

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

Questions (1) and (2):

In determining the amount of income from an office or employment, paragraph 6(1)(a) of the Income Tax Act (the “Act”) requires the inclusion of the value of any kind of benefits received or enjoyed “... in respect of, in the course of, or by virtue of an office or employment...” unless they fall within the exceptions listed in subparagraphs 6(1)(a)(i) to (v).

Technical News #13, issued on May 7, 1998, announced new guidelines that assist in the determination of whether employer-paid educational costs are to be considered a taxable benefit. The new guidelines are effective as of May 7, 1998 and will apply to all future assessments and reassessments in an arm’s length employee-employer relationship. This means that these guidelines will generally apply to:

(i) all assessments and reassessments of the 1997 and subsequent taxation years, and

(ii) all future reassessments resulting from an objection or appeal, or from a waiver filed prior to May 7, 1998.

The new guidelines consider three broad categories of training. Only training and educational costs which fall within the third category will be considered of primary benefit to the employee and thus remain taxable. All other training which falls into the first or second category will generally be considered to primarily benefit the employer and, therefore, be non-taxable.

Category 1: Specific Employer-Related Training - Non-Taxable

Courses which are taken for maintenance or upgrading of employer-related skills, when it is reasonable to assume that the employee will resume his or her employment for a reasonable period of time after completion of the course. Whether or not the course leads to a degree, certificate or diploma, and when the course is taken will not affect the taxation of the training.

Category 2: General Employment-Related Training - Non-Taxable

Other business-related courses, although not directly related to the employer’s business. Examples of this category would include stress or time management, employment equity, first-aid and language skills.

Category 3: Personal Interest Training - Taxable

Employer-paid courses for personal interest or technical skills that are not related to the employer’s business; for example, fees paid for a self-interest carpentry course.

The newsletter states that “Courses which are taken for maintenance or upgrading of employer-related skills, when it is reasonable to assume that the employee will resume his or her employment for a reasonable period of time after completion of the courses, will generally be considered to primarily benefit the employer and therefore be non-taxable. For example, fees and other associated costs such as meals, travel and accommodation which are paid for courses leading to a degree, diploma or certificate in a field related to the employee’s current or potential future responsibilities in the employer’s business will not result in a taxable benefit.”

The new guidelines do not necessarily apply in non-arm’s length relationships or in specific examples which evidence that the benefit was in fact primarily for the employee. This will be the case, for example, if the employee and the employer have entered into an agreement under which the remuneration ordinarily paid to the employee is reduced in recognition of training costs incurred by the employer.

It is the employer’s responsibility to determine whether on a case by case basis the reimbursed educational costs should be treated as non-taxable. Relevant documentation which has helped in the determination that the employer-paid training is non-taxable should be kept.

Employees who have their eligible tuition fees paid for or reimbursed by their employer and have not received a taxable benefit are not entitled to claim the tuition tax credit. In addition the education amount is not available, in any case, when employees have their eligible tuition fees paid for or reimbursed by their employer or when they receive remuneration while taking training in connection with their duties of employment.

Question (3):

There is no maximum or minimum on the amount that can be incurred for education costs. However, from the employer’s point of view, section 67 of the Act provides that no deduction shall be made “in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.” There is no standard or gauge to determine reasonableness and thus the courts may freely determine what is reasonable in any assessment that is appealed. Reasonableness in any situation can only be determined on a case by case basis.

For example, employer-paid tuition and related expenses, such as accommodation, for an employee to attend university at a far away location, when the same or similar education program is available nearby, may be unreasonable. In determining whether an individual expense is reasonable “in the circumstances” one would look to the amount sought to be deducted, the purpose of the expenditure, the nature of the expenditure, the similarity to, and amount of, other such expenses claimed, expenses of other employees or officers employed in a similar capacity, and so on.

If it is determined that education costs in respect of an employee are unreasonable, it may indicate that a non-arm’s length relationship exists between the employee and employer or that the benefit was primarily for the employee. The amount of the benefit, therefore, may be taxable under paragraph 6(1)(a) of the Act.

Question (4):

The relevant provision is paragraph 6(1)(a) of the Act, referred to above. Revenue Canada’s current position on employer-paid education costs is stated in Technical News #13, a copy of which is enclosed. Since you are considering providing benefits to your employees, you may also wish to refer to Interpretation Bulletin IT-470R, Employee’s Fringe Benefits, issued on April 8, 1988 which discusses various types of fringe benefits and whether their value should be included in income, and Interpretation Bulletin IT-357R2, Expenses of Training issued on November 6, 1989 which deals with the deductibility by the employer of the costs and expenses of training. Copies of these Interpretation Bulletins are enclosed.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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