29 August 2007 Internal T.I. 2007-0230121I7 - Employee Training Expenses

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: Are the training expenses of a non-arm's length employee reasonable?

Position: Question of fact. General comments provided.

Reasons: Determined on a case-by-case basis.

 								August 29, 2007

	Winnipeg TSO					HEADQUARTERS
								Shaun Harkin, CMA
	Attention: Michael Luzny			(613) 957-9229 

								2007-023012

Technical Interpretation Request: Employer-Paid Educational Costs

We are writing in reply to your letter of April 5, 2007, concerning the taxation of employer-paid training costs in non-arm's length transactions. You ask about a situation where a corporation claimed training expenses for amounts paid to an employee, who is the son of the sole shareholder of the corporation, to upgrade his employer-related skills. The son resumed employment with the corporation after successfully completing the training course in question.

Our Comments

As stated in ITTN #13, when training is taken primarily for the benefit of the employer there is no taxable benefit, whether or not this training leads to a degree, diploma or certificate. A taxable benefit arises when the training is primarily for the benefit of the employee.

In the situation described in your letter, the taxpayer's position that the training was taken primarily for the benefit of the employer seems to be supportable as the son is still at work two years after successfully completing the training, the training resulted in the business improving by purchasing new equipment and technology, the son trained other employees as a result of skills obtained from his training, the corporation's sales increased due to the son's training, and the son will likely take over the business in the future. Accordingly, if the expenses are reasonable, the costs are deductible to the employer and there would be no taxable benefit to the son.

Whether an expense is reasonable in a particular circumstance is a question of fact. It appears your basis for possibly finding that the training expenses are unreasonable is that lower expenses would have been incurred had the son lived in residence at the school. In our view, it would be difficult to argue that the expenses are unreasonable because the son did not live in residence. In fact, it appears that the amount of the expenses is similar to what it would cost under the CRA travel policy to send a CRA employee on a two-year course away from home. Accordingly, in our view there is not a strong basis for denying the expenses on the grounds that they are unreasonable.

With respect to the money orders and meals, the CRA would be justified in asking what the money orders were for. If these money orders were found to be, in substance, a per diem for food, the deductibility of such expenses would be subject to reasonableness and the 50% rule in section 67.1 of the Act for food and beverages. If the money orders were not, in substance, a per diem for food then the deductibility of these money orders would be based on the nature of the outlay as demonstrated by the corporation.

In response to the four specific questions asked in your memorandum of April 5, 2007 we provide the following comments:

1) An employer may normally deduct expenses incurred in respect of an employee's training provided that such expenses are incurred for the purpose of earning business income and are reasonable in the circumstances. Amounts determined to be unreasonable would not be deductible by the employer, per section 67 of the Act, to the employer.

2) Where it is determined that a training expense is unreasonable for purposes of section 67 the factors that lead to this conclusion would likely also indicate a taxable benefit has been conferred on the employee.

3) Where an employer funds employee training, the related reasonable costs (course fees, travel, food, beverages and lodging) are deductible as a current business expense. However, the deductibility of such expenses is subject to any limitations in the Act on deductibility, such as the 50% rule in section 67.1 for food and beverages.

4) If an employee for whom training expenses are being paid by the employer is not dealing at arm's length with that employer, a determination will have to be made as to whether the training expense was reasonable taking into consideration all the relevant facts and circumstances of the particular case. Factors to consider include:

• 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;
• the training expenses of other employees or officers, either for the same employer or an employer in a similar business employed in a similar capacity;
• a comparison of the expenses of others attending the same training;
• the location of the training (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).

Normally, the training expenses of a non-arm's length employee would be considered reasonable when the training expenses are essentially the same as they would be if they were provided to an arm's length employee.

We trust that these comments will be of assistance to you.

Renée Shields
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch