5 July 2016 External T.I. 2016-0634001E5 - Taxability of free or reduced tuition

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: Whether the value of free or reduced tuition provided to the family member of an employee is taxable to the employee?

Position: Question of fact.

Reasons: Conditions in 6(1)(a)(vi) must be satisfied.

XXXXXXXXXX							2016-063400
								T. Baltkois
July 5, 2016

Dear XXXXXXXXXX:

Re: Taxability of free or reduced tuition

We are writing in response to your correspondence of February 25, 2016, in which you asked whether free or reduced tuition provided to a family member of an employee of a private school (School) should be included in the employee’s income (as employment income) under paragraph 6(1)(a) of the Income Tax Act (Act), or excluded from the employee’s income by subparagraph 6(1)(a)(vi) of the Act.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Generally, all benefits received or enjoyed by an employee (or by a person who does not deal at arm’s length with the employee) from an office or employment are included in the employee’s income under paragraph 6(1)(a) of the Act, unless specifically excluded by another provision of the Act. Therefore, the value of any tuition assistance received by an employee’s family member from the employee’s employer will generally be included in the employee’s income unless excluded by subparagraph 6(1)(a)(vi) of the Act.

Subparagraph 6(1)(a)(vi) of the Act provides that any benefit an employee’s family member receives or enjoys under a program offered by the employer that is designed to assist the family member in furthering his or her education, will be excluded from the employee’s income provided that certain other conditions are also met. Subparagraph 6(1)(a)(vi) of the Act generally applies to scholarships or bursaries (e.g., free or reduced tuition fees) provided to an employee’s family member to attend an elementary, secondary, or post-secondary school (private or otherwise).

In the situation you describe, employees at the School are entitled to receive a tuition discount for any family member who is eligible to attend the School. This discount XXXXXXXXXX is available to all employees.

Certain employees at the School have negotiated an additional tuition discount XXXXXXXXXX. It is our understanding that these additional tuition discounts are not available to all employees at the School, and that the School does not currently have a policy in place concerning these additional tuition discounts.

In order to exclude the value of a tuition discount (or free tuition) received or enjoyed by an employee’s family member from the employee’s income, all of the following conditions in subparagraph 6(1)(a)(vi) of the Act must be met:

• the benefit is received or enjoyed under an employer-provided program that is designed to assist individuals in furthering their education;
• it must be reasonable to conclude that the benefit is not a substitute for the salary, wages, or other remuneration of the employee; and
• the employee and employer must deal with each other at arm’s length.

Benefits received or enjoyed under a program designed to assist with the furthering of education

Provided that other conditions are also met, subparagraph 6(1)(a)(vi) of the Act excludes from the income of an employee, the value of any benefit the employee’s family member receives or enjoys under an employer-provided program that is designed to assist the family member in furthering his or her education.

The terms “program” and “designed” are not defined for purposes of subparagraph 6(1)(a)(vi), or elsewhere in the Act, nor do the meanings of these terms appear to have been specifically interpreted by the courts for purposes of subparagraph 6(1)(a)(vi) of the Act (based on a review of Canadian income tax law). In such circumstances, and absent a judicial interpretation of a term or phrase, we generally rely on its ordinary meaning (e.g., dictionary definition). The Concise Canadian Oxford Dictionary defines the following terms which assist in this regard:

A “program” is defined as, “a course of activities or actions undertaken to achieve a certain result; a plan of future events; a plan offering subscribers certain benefits”.

A “plan” is defined as, “a formulated and esp. detailed method by which a thing is to be done”.

The term “designed” is defined as, “planned, purposed, intended; outlined, formed, or framed according to some design”.

The ordinary meaning of the terms “program” and “designed” suggest that an employer-provided education assistance program should be an organized, detailed, and structured plan with a clear purpose or objective. Such a plan may describe such things as scope (e.g., to whom the plan applies), conditions or criteria, duration and timing, etc.

For purposes of subparagraph 6(1)(a)(vi) of the Act, it is our view that a program would generally:

• be documented in writing (e.g., in a policy, as part of a collective agreement, etc.);
• include objective student-based selection criteria/conditions; and
• be available to all employees.

While it is a question of fact whether a particular program is designed to assist with the furthering of education, it is our view that most scholarships and bursary programs would generally satisfy this condition. See paragraphs 3.7 and 3.8 of Income Tax Folio S1-F2-C3, Scholarships, Research Grants and Other Education, for more information about scholarships and bursaries.

The benefit is not a substitute for the salary, wages, or other remuneration of an employee

Whether it may be reasonable to conclude that the tuition assistance received or enjoyed by an employee’s family member is not a substitute for the salary, wages, or other remuneration of the employee is a question of fact, and would have to be determined on a case-by-case basis. Factors which may suggest that the tuition assistance is not a substitute for salary, wages, or other remuneration could include:

• the employee does not receive lower salary, wages, or other remuneration than other employees (i.e., employees with similar credentials, similar job functions, experience, seniority, etc.) whose family members do not receive (or are not eligible to receive) tuition assistance;
• the employee does not forego salary, wages, or other remuneration to which he or she is entitled (currently or in a future year), to fully or partially fund the tuition assistance;
• there is no evidence which links the tuition assistance to a specific reduction in the employee’s salary, wages, or other remuneration;
• tuition assistance is not provided as full or partial consideration for entering into an employment contract.

In our view, the fact that an employer may provide different levels of tuition assistance to different groups or classes of employees would not, in and of itself, be sufficient to conclude that the assistance was a substitute for salary, wages, or other remuneration.

The employee and employer must deal with each other at arm’s length

For information on what constitutes arm’s length, please see Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm’s Length.

Summary

It is a question of fact whether the conditions in subparagraph 6(1)(a)(vi) of the Act, as outlined above, have been met. When these conditions are satisfied, the value of any tuition assistance received or enjoyed by an employee’s family member would be excluded from the employee’s income by subparagraph 6(1)(a)(vi) of the Act. However, in such a case, there may be tax consequences for the employee’s family member. For additional information, please refer to paragraphs 3.18 and 3.90 of Income Tax Folio S1-F2-C3.

We trust these comments will be helpful.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch