2001 Ruling 2000-0053243 - BONUS FORFEITED FOR SCHOOL ALLOWANCE

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:

Whether employees can forfeit their right to a bonus in favour of a non-taxable schooling allowance to cover board and lodging where they have children attending postsecondary school outside their community because there is no suitable school in their area.

Position:

Employees can elect to receive non-taxable schooling allowance pursuant to subparagraph 6(1)(b)(ix) of the Act.

Reasons:

The requirements of 6(1)(b)(ix) are met in that the allowance is reasonable, there is no school suitable for the child in the community, the child attends the closest suitable school (operating in his or her official language) with suitable boarding facilities, and the employees are required to live in the community in order to perform their duties of employment. The employee forfeits his or her right to the bonus before its quantum is established, and before the school year begins. The choice is irrevocable except in certain conditions. Therefore, it falls within the guidelines set out in IT-529 Flexible Benefit Plans

XXXXXXXXXX 		2000-005324

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling. We also acknowledge your letter of XXXXXXXXXX amending the facts and proposed transactions presented in the original ruling request.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Definitions

In this ruling unless otherwise expressly stated:

"Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

"Child" has the extended meaning assigned by subsection 252(1);

"Public corporation" has the meaning assigned by subsection 89(1);

"Regulations" means the Income Tax Regulations, Consolidated as of December 31, 1977;

"School year" means the ordinary school year at post-secondary educational institutions (usually the September to December term and the following January to April term) that begins immediately after the making of an election described in Paragraph 12;

"Self-contained domestic establishment" has the meaning assigned by subsection 248(1);

"Spouse" has the extended meaning assigned by subsection 252(3);

"Taxable Canadian corporation" has the meaning assigned by subsection 89(1);

"XCo" means XXXXXXXXXX.

Our understanding of the facts, proposed transactions, and purpose of the proposed transactions is as follows:

Facts

1. XCo is a taxable Canadian public corporation. Its shares are listed on the XXXXXXXXXX stock exchanges. XXXXXXXXXX.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. All XXXXXXXXXX employees are required to live in XXXXXXXXXX. As XXXXXXXXXX is the only city or town within a reasonable commuting distance from the XXXXXXXXXX, it would not be feasible for an employee to live anywhere else and still be employed by XCo.

5. XXXXXXXXXX, there remain very few choices regarding post secondary education for employees' children.

6. XXXXXXXXXX.

7. XXXXXXXXXX. Although XXXXXXXXXX offers a limited number of degrees, the degrees offered are very general and not all of the courses are offered on-site. Some courses are offered through a home-study program.

8. XXXXXXXXXX It offers a significant number of degrees also offered by more traditional universities but most, if not all, of these courses are offered XXXXXXXXXX.

9. Due to the remoteness of XXXXXXXXXX and the lack of traditional, well known universities in the area, many of XCo's employees send their children outside of XXXXXXXXXX to attend university on the basis that the educational institutions described above are not suitable in their circumstances.

10. Many employees' children that leave XXXXXXXXXX for university or college would attend the University of XXXXXXXXXX or a college in XXXXXXXXXX. However, certain students may be accepted into specialized programs that are not available in XXXXXXXXXX or may graduate from high school with the top marks in which case other schools may be more suitable for them.

11. XCo employees in XXXXXXXXXX are compensated by way of regular salary and annual bonus. As for regular salary, employees are paid according to the pay band they fall into. In addition to regular pay, all XCo XXXXXXXXXX employees are eligible for annual cash bonuses dependent on the business division meeting its goals in the year. They are paid in XXXXXXXXXX of the following year. The majority of the employees would be eligible for bonuses between $XXXXXXXXXX and $XXXXXXXXXX, depending on their pay band, and upper management bonuses would average $XXXXXXXXXX.

Proposed Transactions

12. XCo will institute a schooling allowance program whereby any XXXXXXXXXX employee will have the opportunity to elect to forfeit all or a portion (see 14 below) of his or her annual bonus for any particular year. This election will be made before the end of XXXXXXXXXX of each year. At this point in the year, the employee will not know the quantum of his or her bonus, if any, that may be receivable in respect of that year.

13. Provided the employee meets the requirements described in Paragraph 17 below, he or she will receive, in lieu of the forfeited amount, a schooling allowance in respect of any of his or her children attending school at a post-secondary institution outside of XXXXXXXXXX. The schooling allowance will be in respect of the school year. For example, the schooling allowance for an election made in XXXXXXXXXX will cover the XXXXXXXXXX school term and the XXXXXXXXXX school term.

14. The amount forfeited (and therefore receivable as a schooling allowance for room and board) will be the lessor of two amounts as follows:

• $XXXXXXXXXX per month that the child is in full-time attendance at the school during the school year (maximum of 8 months); and
• The total amount of the employee's bonus that will otherwise be payable.

15. The election, once made, will be irrevocable except in 2 narrowly defined cases:

• Where a student is forced to cease full-time attendance at the school for medical reasons, the election for the remaining months in the school year may be revoked; or
• Where a student ceases full-time attendance during the September to December term, an election may be revoked at the end of that term. In this case, the employee will lose the allowance in respect of any months where full-time attendance was not maintained during that term.

16. In XCo's view, $XXXXXXXXXX per month is a reasonable amount in respect of room and board in relation to the cost of staying in residence at the closest major post-secondary institutions in XXXXXXXXXX. For example, at the XXXXXXXXXX, the average cost of staying in a residence with a full meal plan is approximately $XXXXXXXXXX for an 8 month school year.

17. At the time the election is made, the employee will sign a declaration to be submitted to XCo for evaluation providing, with appropriate proof, the following information:

• The number of months the employee's child will be in full-time attendance with a full course load at a recognized post-secondary educational institution (the "school") outside XXXXXXXXXX during the School Year. A letter of acceptance from the school registrar, with evidence of a full course load, must be submitted at the time of the election;
• The primary language of instruction at the school is the child's primary language, and is English or French;
• There is no suitable school for the child in XXXXXXXXXX and the reasons why; and
• There is no suitable school closer to XXXXXXXXXX than the one being attended having suitable boarding facilities. If an employee rejects a community with a suitable school that is closer to XXXXXXXXXX than the one attended, reasons must be given to justify why the boarding facilities in the closer community were not suitable.

18. XCo will establish internal guidelines in order to evaluate the declarations. Such guidelines will be consistent with the language of the legislative provision, its intent, the jurisprudence and any CCRA pronouncements.

19. XCo will evaluate each declaration on a case-by-case basis against the internal guidelines on a consistent basis.

20. If XCo agrees with the employee's declaration, the employee's election to receive the schooling allowance will be accepted.

21. In XXXXXXXXXX of each year, employees will be informed of the quantum of the bonus that they otherwise would have been entitled to receive in respect of the previous year. Employees will receive their schooling allowance in two instalments:

• The first instalment will he paid in XXXXXXXXXX for the previous September to December term. The employee will receive this instalment when confirmation is received by XCo that the employee's child was in full-time attendance during that term. The amount of the first instalment will equal the lesser of (i) $XXXXXXXXXX per month of full-time attendance during the September to December term, and (ii) the amount of the bonus that was otherwise payable divided by 8 (i.e. the number of months in the School Year) times the number of months of full time attendance during the term. If the employee's bonus otherwise payable is in excess of the maximum school allowance receivable under the plan of $XXXXXXXXXX then this excess will also be received by the employee at this time and will be treated as ordinary employment income subject to source deductions. If the employee's child did not maintain full time attendance at the school during the September to December term, then the employee will forfeit the lesser of the two amounts above times the number of full months where full time attendance was not achieved.
• The second instalment of the schooling allowance will be paid in XXXXXXXXXX for the January to April term. Again, the employee must confirm full-time attendance to XCo for that term before receiving the allowance. The second instalment of the school allowance is calculated in the same manner as the first instalment. Acceptable evidence of full time attendance for each term will be a copy of the student's T2202 Education Amount Certificate, a copy of the student's transcript, or a letter from the school registrar.

Purpose of Proposed Transactions

Given XCo's XXXXXXXXXX, there is a need to retain current staff and attract additional skilled labour. There are XXXXXXXXXX and increasing competition in Canada's job market. Many of XCo's employees have university or college aged children, and given the lack of suitable university or college institutions in the XXXXXXXXXX area, employees have no choice but to send their children outside of the community to receive the desired education. XCo believes the proposed schooling allowance program would assist in retaining experienced staff and attracting the required workforce.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our ruling is as follows:

We confirm that, in respect of the employees of XXXXXXXXXX XCo who elect to receive a schooling allowance, and forfeit their bonus in accordance with paragraphs 12 to 21 above, the schooling allowance will not be included in their employment income by virtue of subparagraph 6(1)(b)(ix) of the Act.

The ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and is binding provided that XCo commences the schooling allowance program by XXXXXXXXXX.

The ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Yours truly

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch