29 June 1993 Internal T.I. 9307267 F - Education Trust for Employees' Children - EBP

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.

June 29, 1993

Sudbury District Office Business and General Division Mr. Brian Heins

Establishment of Education Trust

This is in reply to your facsimile transmission of March 22, 1993 and copy of a letter from the XXXXXXXXXX has indicated that it may establish an education trust and has asked the Department for comments on the tax treatment of the related benefits.

XXXXXXXXXX

Our Comments:

At the outset, we wish to mention that this correspondence involves proposed transactions. Where a taxpayer wishes to know the tax consequences of proposed transactions, an advance income tax ruling may be requested pursuant Information Circular 70-6R2 and the related Special Release dated September 30, 1992. Where such a ruling is requested, copies of all relevant documents and a complete statement of the facts and issues should be submitted along with a deposit of $450 (See paragraph 18 of Information Circular 70-6R2). We also wish to note that paragraph 21 of Information Circular 70-6R2 indicates that it is the Department's practice not to comment on proposed transactions other than in the form of an advance income tax ruling.

While an advance income tax ruling has not been submitted and all the relevant facts and information are not available (e.g., a copy of the trust agreement), we are providing you with the following general comments to assist you in responding to the XXXXXXXXXX

Where an employer wishes to establish a trust under which benefits will be paid in respect of its employees, the income tax treatment of the benefits depends on the terms and characteristics of the trust. For general comments in this regard, reference may be made to the second paragraph of the Special Release dated May 31, 1991 to Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts". Since a further consideration is normally the overall tax ramifications of such a trust, we have also included comments in this respect. Where an education trust is established by an employer for the benefit of its employees' children in circumstances where employer contributions may revert back to the employer if a certain child does not attend a post secondary educational institution, we would usually expect that the arrangement would be regarded as an "employee benefit plan" (EBP) as defined in subsection 248(1) of the Income Tax Act (the Act). General comments on this type of arrangement are set out in paragraphs 3, 4, and 5 of IT-502. On the basis that the exclusions in paragraph 4 are not applicable, an EBP is any arrangement under which the employer or someone not dealing at arm's length with the employer makes contributions to another person (called a custodian) and under which one or more payments will be made to or for the benefit of employees, former employees or persons with whom the employees and former employees do not deal at arm's length.

We are also making the following additional comments concerning the tax consequences of an EBP:

(a)     With respect to the tax consequences of benefits received from an educational trust that is regarded as being an EBP, all amounts received out of or under such a plan represent income from an office or employment pursuant to paragraph 6(1)(g) of the Act. For additional comments in this regard, reference may be made to paragraphs 6 to 15 of IT-502. We also wish to note specifically that where payments are made to someone other than the employee, reference should be made to paragraph 10 of IT-502.

(b)     The tax consequences to employers who contribute to the EBP involve paragraph 18(1)(o), subsection 18(10) and section 32.1 of the Act. The general effect of these provisions is that, subject to subsection 18(10), employer contributions are not deductible until taxable payments are made out of the capital of the plan. For comments on the application of these provisions, you may refer to paragraphs 16 to 24 of IT-502.

(c)     With respect to the income earned by an EBP that is a trust, reference can be made to paragraph 26 to 31 of IT-502.

As a final comment, we wish to caution that the tax consequences of any particular arrangement can only be determined following a review of all the relevant facts and documentation.

Should further technical assistance be required, we would be pleased to provide our views.

P. D. Fuoco Section Chief Personal and General SectionBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch