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: Is financial assistance paid to individuals by the XXXXXXXXXX .?
Position: Yes.
Reasons: Benefits funded under the EI Act will generally be taxable under 56(1)(r) of the Act. Benefits funded under the CRF may be taxable as bursaries under paragraph 56(1)(n) of the Act.
5-982701
XXXXXXXXXX Karen Power, CA
(613) 957-8953
November 4, 1998
Dear XXXXXXXXXX:
Re: Taxation of Education and Training Costs
We are writing in reply to your correspondence of June 5, 1998, our reply of September 25, 1998 and telephone conversations (Power/XXXXXXXXXX) concerning the taxation of various training benefits provided to clients of the XXXXXXXXXX.
You have provided us with the following information:
1. Government funding is received by the XXXXXXXXXX, which in turn makes distributions to or on behalf of qualified individuals for employment and/ or training costs.
2. Distributions can include tuition paid directly to an educational institution, tuition and/or living expenses paid directly to the individual or wage supplements/reimbursements paid to an employer for employment (work experience) programs.
Our Comments:
It is our understanding that the funding received by the XXXXXXXXXX is obtained through a regional bilateral agreement (“RBA”) with Human Resources Development Canada (“HRDC”). Funding for benefits provided under an RBA generally comes from two different streams. A portion of the funding may be received under the authority of section 63 of the Employment Insurance (“EI”) Act and the remaining portion of funding is likely received from the federal government’s Consolidated Revenue Fund (“CRF”), in which the terms and conditions are approved by Treasury Board.
Individuals who receive funding under section 63 of the EI Act would need to meet one of the following eligibility requirements:
- individuals for whom a benefit program has been established (entitled to regular EI benefits)
- individuals who have had an insurance benefit end in the three years before applying for assistance, and
- individuals who have received maternity or parental leave benefits in a period that began no more than five years before applying for assistance.
Individuals who do not meet the above requirements and who receive training benefits would be funded from the CRF.
Benefits Funded Under the EI Act:
In our view, all payments/allowances received by individuals or paid directly to educational institutions in the above situation, which are funded under the EI Act, would be taxable under paragraph 56(1)(r) of the Income Tax Act (the “Act”). This paragraph was included in Bill C-28, which received Royal Assent on June 18th, 1998. This amendment is retroactive to June 30, 1996, the date of coming into force of the EI Act and Revenue Canada will apply the amendment beginning with the 1997 tax year.
Paragraph 56(1)(r) of the Act subjects to tax various training-related amounts. Specifically, this paragraph includes in a taxpayer’s income financial assistance received under Part II of the Employment Insurance Act, as well as similar financial assistance received from a government or government agency under the terms of an agreement with the Canada Employment Insurance Commission. As a result, recipients of financial assistance under Part II EI programs will be taxed regardless of whether the payments have been made directly by the federal government, a province or an organization under a devolution agreement.
Benefits Funded by the CRF:
It appears that amounts paid from the CRF stream of funding are not made under the EI Act and, consequently, would not be taxable under paragraph 56(1)(r) of the Act. All benefits paid to individuals or directly to educational institutions from this funding stream must be examined on a case by case basis. Without knowing all the circumstances under which training funds are approved or the purpose of the individual payments, we can only advise that benefits purchased with CRF funds will likely be taxable as bursaries as explained below.
Paragraph 56(1)(n) of the Act requires the inclusion into income of certain scholarships, bursaries and fellowships, with a $500 exemption. A bursary is defined in Webster's Third New International Dictionary as "a sum or varying amount given or granted to a needy student." In our view, the definition of a bursary is broad enough to encompass almost any form of financial assistance paid to a student to enable the student to pursue his or her education, including a payment based on the means or needs of the student. This can include the value of ancillary assistance such as travel assistance, lodging, books or equipment, dependant care and so on. It will be a question of fact to be determined based on a review of all surrounding circumstances as to whether a particular individual has received a scholarship or bursary that is to be included into the individual's income under paragraph 56(1)(n) of the Act.
A bursary usually applies to education at the post-secondary school level or higher but there are circumstances where bursaries can be awarded for education below the post-secondary school level. Scholarships and bursaries ordinarily assist the student in proceeding towards a degree, diploma, or other certificate of graduation. They may apply to academic disciplines or to trades (such as plumbing or carpentry). Normally, a student is not expected to do specific work for the payer in exchange for a scholarship or bursary.
Tuition Tax Credit
Under subparagraph 118.5(1)(a)(iii.1) of the Act, an individual may be prevented from claiming the tuition tax credit for tuition fees in respect of which the individual was entitled to receive a reimbursement or any form of assistance under a program of Her Majesty in right of Canada or a province designed to facilitate the entry or re-entry of workers into the labour force. However, this is not the case if the reimbursement or assistance is included in the individual’s income.
In our view, provided all of the other requirements of section 118.5 have been met, an individuals receiving training assistance which is taxable under paragraph 56(1)(r) or 56(1)(n) of the Act would be entitled to claim the tuition credit.
Education Tax Credit
In order for students to claim the education credit under subsection 118.6(2) of the Act, they must be enrolled in a "qualifying education program" as defined in subsection 118.6(1) of the Act. In general, the credit is not available to a student who receives any allowance, benefit, grant or reimbursement for expenses (other than as a scholarship, fellowship or bursary, prize for achievement in a field of endeavour ordinarily carried on by the student or loan granted in accordance with the Canada Student Loans Act or Student Loans and Scholarships Act of the Province of Quebec) from a person with whom the student is dealing at arm’s length.
In our view, the training assistance received by the individuals described above, under Part II of the EI Act or under the CRF will normally be considered allowances or benefits for the purposes of section 118.6 of the Act and the recipients would not be eligible for the education tax credit.
Form T2200
When tuition fees are paid on behalf of a student, Form T2200 or T2202A should be issued to students who are enrolled in a qualifying program, whether or not it is actually the student who paid the tuition.
Withholding Taxes
Income tax is required to be withheld from amounts taxable under paragraph 56(1)(r) of the Act, and these amounts should be reported on a T4A Summary and related T4A Supplementaries. Income tax is not required to be withheld from amounts taxable under paragraph 56(1)(n) of the Act, although a T4A Summary and related T4A Supplementaries are required to be prepared.
Wage Supplements/Reimbursements
The wage supplements/reimbursements described above are paid directly to the employer. The employer may then ‘top up’ an employee’s salary with these amounts. Generally, all amounts received by an individual from their employer as wages would be considered employment income taxable under section 5 of the Act. You should note that subparagraph 56(1)(r)(i) of the Act provides for the inclusion in income of amounts received by a taxpayer in the year as earnings supplements provided under a project sponsored by a government or government agency in Canada to encourage individuals to obtain or keep employment. Whether this subparagraph applies, rather than section 5, depends on the facts of a particular situation.
We trust our comments will be of assistance to you.
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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