29 July 2004 Ministerial Correspondence 2004-0078841M4 - Training Trust Funds

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.

Principal Issues: The determination of a training trust fund's non-profit status, and the income tax status of benefits received by an employee from such funds

Position: General comments.

Reasons: Questions of fact.

Signed on July 29, 2004

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable John McCallum, Minister of National Revenue, has asked me to reply to your correspondence of March 2, 2004, which included a submission entitled XXXXXXXXXX that you sent to the Honourable Joe Volpe, Minister of Human Resources and Skills Development. Mr. Volpe forwarded a copy of your correspondence and submission to Minister McCallum's predecessor, the Honourable Stan Keyes, on May 12, 2004. I apologize for this delayed response.

In several parts of your submission, concern was expressed over the interpretation of the Canada Revenue Agency (CRA) with respect to employment benefits under paragraph 6(1)(a) of the Income Tax Act as they relate to employer-provided training. In this regard, I agree with the point made in the submission about the importance of employee training to Canada's economy. I also believe that the CRA's position on this issue, which was established in consultation with interested parties such as the Business Council on National Issues, the Tax Executive Institute and the Canada Payroll Association and was first published in Income Tax Technical News No. 13, acknowledges the important role played by employee training.

It is the CRA's position that employer-provided training can be grouped into three broad categories-specific employer-related training, general employment-related training and personal interest training-and only the latter category is considered to result in taxable employment benefits. Since each situation is different, all of the facts would have to be considered before making a conclusion in a specific case. However, it is our view that the training provided under Training Trust Funds will generally fall under one of the first two categories and will therefore likely be non-taxable.

Another income tax issue that was raised in your submission was the income tax status of Training Trust Funds. As the paper correctly noted, a Training Trust Fund may qualify as a non-profit organization for purposes of paragraph 149(1)(l) of the Act only if it conforms with the requirements set out in Interpretation Bulletin IT-496R, Non Profit Organizations. Your submission indicates that, since the determination of non-profit status can only be made at the end of a particular taxation year, annual budgeting is problematic for Training Trust Funds and a legislated solution is required. It also recommends that Training Trust Funds be permitted to accumulate reserves without jeopardizing their non-profit status, since it is normal for these types of funds to accumulate balances during better economic times, and use them during downturns in the economy.

Since paragraph 149(1)(l) of the Act provides, among other things, that an organization must be operated exclusively for non-profit purposes, it is the CRA's view that an organization's non-profit status can only be determined after a review of the relevant facts. Nonetheless, an organization that meets the criteria in paragraph 149(1)(l) for having been organized for a purpose other than profit, and is subsequently operated in strict conformity with this organizational goal, would generally not have any difficulty meeting the retrospective operational test.

With regard to the issue of growing cash reserves within Training Trust Funds, it is our view that accumulated excess income will not necessarily result in taxable status for a particular non-profit organization, provided that such amounts are reasonable in relation to the needs of the particular organization. As indicated in paragraph 9 of IT-496R, the amount of accumulated excess income that would be considered reasonable in relation to the needs of an association to carry on its non-profit activities and goals is a question of fact that must be determined on a case-by-case basis.

Although Training Trust Funds' income may be exempt from tax under paragraph 149(1)(l) of the Act in a given year, your paper requests a legislative solution to eliminate the uncertainty associated with the annual determination of non-profit status. In addition, your paper recommends that an employer's deduction for contributions to a Training Trust Fund be replaced by a refundable tax credit so that non-profitable employers receive a benefit for their contributions. Since these recommendations, as well as your recommendations for the income tax treatment of employer-provided training, would require changes to income tax policy, as well as amendments to the Act, I have forwarded a copy of your paper to Mr. Bob Hamilton, Senior Assistant Deputy Minister of the Tax Policy Branch of the Department of Finance, for his consideration.

I appreciate the opportunity to address your concerns.

		Yours sincerely,

		Stephen Rigby
		Assistant Commissioner
		Policy and Planning Branch

c.c.: Mr. Bob Hamilton

Senior Assistant Deputy Minister
Tax Policy Branch
Department of Finance
L'Esplanade Laurier - Floor: 16EE
140 O'Connor Street
Ottawa ON K1A 0G5

The Honourable Joe Volpe, P.C., M.P.

Minister of Human Resources and Skills Development
House of Commons
Ottawa ON K1A 0A6

James Gibbons
2004-007884
June 22, 2004