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: Would educational costs paid by a company for a shareholder/employee be a) deductible to the corporation and b) taxable to the individual?
Position: The answer depends on whether or not subsection 15(1) of the Act is applicable.
Reasons: In situations where subsection 15(1) of the Act applies, the corporation would not be entitled to a deduction and the cost of the training would be included in the individual's income pursuant to subsection 15(1). In situations where subsection 15(1) does not apply, the education costs will generally be deductible provided they are reasonable. The guidelines provides in Technical News #13 should be used to determine whether the individual would receive a taxable benefit pursuant to paragraph 6(1)(a) of the Act. The employer will have to determine the taxation of educational costs on a case by case basis.
XXXXXXXXXX Karen Power, CA
(613) 957-8953
April 5, 2000
Dear Sirs:
Re: Employer-Paid Educational Costs
We are writing in reply to your letter of January 20, 2000, concerning the taxation of employer-paid educational costs in non-arm's length transactions. You have requested our comments on the following scenarios all of which relate to the employee/shareholder owner of a Canadian Controlled Private Corporation ("CCPC") and are hypothetical situations.
In all situations the employee/shareholder is the recipient of the education/training and is accorded the education/training on the same basis that it would be accorded to any other employees of the corporation. The services which are provided by the CCPC's are primarily knowledge based. Under each scenario, the company has agreed to reimburse all fees, travel, meal and accommodation costs. You have also indicated in a telephone conversation (Power/XXXXXXXXXX) that most of the CCPC's have very few employees. In particular, you have requested we comment on the appropriate tax treatment of the expense by the corporation and related reporting requirements vis-à-vis the individual.
Scenario 1 - Course of Less Than 14 Days and Costs Less Than $2,500
The individual attends a course that is directly related to the skill sets used regularly in earning revenues for the corporation. During the course, the individual is not available to earn revenues for the corporation.
Scenario 2 - Courses of More Than 30 Sessions and Costs Less Than $6,000
The individual attends a course that is directly related to the skill sets used regularly in earning revenues for the corporation. The course is taken twice weekly during evenings on a part-time basis. The individual performs the usual duties of the employment during the day.
Scenario 3 - Courses of More Than 30 Sessions and Costs Less Than $6,000
The individual attends a course that is indirectly related to the skill sets used regularly in earning revenues for the corporation. The course is taken twice weekly during evenings on a part-time basis. The individual performs the usual duties of employment during the day.
Scenario 4 - Executive MBA Program Over Three Years ands Costs More Than $35,000
The individual attends a course that is indirectly related to the skill sets used regularly in earning revenues for the corporation. The course is taken twice weekly during evenings on a part-time basis. At other times the individual attends the course on a full-time basis, usually for periods not exceeding 21 days at any one time, when the individual would not be available to carry on regular duties. At all other times, the individual performs the usual duties of employment.
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.
An employer may normally deduct expenses incurred in respect of an employee's training, regardless of whether it is the employer or the employee who benefits from the training, provided that such expenses are reasonable in the circumstances. If the person for whom the training is being provided is both a shareholder and an employee of the corporation, a determination will have to be made, taking into consideration all the relevant facts and circumstances of the particular case, as to whether the training was conferred by the corporation on the person as a shareholder or as an employee. In the first case, subsection 15(1) of the Act may apply and, in the latter case, paragraph 6(1)(a) of the Income Tax Act (the "Act") may apply.
Under subsection 15(1), the amount or value of a benefit conferred on a shareholder by a corporation in a taxation year is included in the shareholder's income for the year. If a transaction involving a corporation and a shareholder is a bona fide business transaction, there is no subsection 15(1) benefit to the shareholder. Normally, a transaction is considered to be bona fide when its terms and conditions are essentially the same as they would be if the transaction were entered into by parties dealing at arm's length. If an amount is included in the income of a shareholder under subsection 15(1), such amount is not allowed to the corporation as a deduction from income.
In scenarios 1 & 2, you have indicated that the training provided to the employee/shareholder is directly related to the income earning activities of the corporation. In our view, this type of training primarily benefits the corporation and would likely be provided to employees dealing at arm's length. In addition, in our view, the costs related to such education/training would be deductible to the corporation provided they are reasonable. Based on this same reasoning, no benefit would be required to be included in the employee/shareholder's income by virtue of subsection 15(1) or paragraph 6(1)(a) of the Act.
We are unable to provide you with conclusive comments with respect to scenarios 3 & 4. Each such situation must be examined on a case by case basis. As discussed above, a determination will have to be made on whether the training was conferred by the corporation on the person as a shareholder or as an employee. Without knowing the relevant industry practices, the actual number of employees and other significant factors, we are unable to determine whether the terms and conditions of the training provided under scenarios 3 & 4 are essentially the same as they would be if the transaction were entered into by parties dealing at arm's length.
If after a review of all relevant facts, the employer concludes that subsection 15(1) of the Act is not applicable, the guidelines provided in Technical News #13 can be used to assist in the determination of whether or not employer-paid educational costs are to be considered a taxable benefit under paragraph 6(1)(a) of the Act.
Finally, you have asked whether the CCRA would be prepared to extend the interpretations outlined in IT-357R2 Expenses of Training applicable to self-employed individuals to corporations and their employee/shareholders. In our view, the comments contained in paragraph 2 through 6 of IT-357R2 have been made in respect of self-employed individuals and would not extend to employee/employer situations.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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