1 September 1993 External T.I. 9318295 F - Employee Training Trust Fund

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Employee Training Trust Fund

This is in reply to your letter of June 17, 1993 requesting a written technical interpretation of the application of paragraph 149(1)(l) of the Income Tax Act (the "Act") in a particular fact situation involving a pro forma Employee Training Trust Agreement.

You indicate that in accordance with the Canadian Jobs Strategy Program administered by Employment and Immigration Canada, an employer would settle a lump sum on this trust and additional contributions to this trust would be made by the employer and the federal government. You then ask the following three questions:

1.     Is the trust a non-profit organization under paragraph 149(1)(l) of the Act, such that income earned on funds held on deposit in the trust and the federal government's contributions to the trust are not taxable?

2.     Does the employer get a deduction for contributions made to the trust in the years such contributions are made?

3.     Is there any taxable benefit to employees who receive training funded by the trust?

As indicated in paragraph 21 of Information Circular 70-6R2, the Rulings Directorate does provide written opinions on the interpretation of specific provisions of the Act, however, when a requested interpretation relates to a contemplated transaction, a taxpayer should request an advance ruling rather than an opinion. From the information provided it appears that your client is contemplating a proposed transaction or transactions.

Assurances as to the tax consequences of particular proposed transactions can only be given in the context of an advance ruling.  As indicated in the last sentence of paragraph 21 of IC 70-6R, opinions and advice are not advance ruling and are not binding of the Department.

In view of the foregoing the following comments are an expression of our opinion based on your enclosures and comments. As such they do not constitute an advance ruling and are, thus, not binding on the Department.

Our Comments:

Although it could be argued that a trust could qualify as a non-profit organization ("NPO") pursuant to the conditions set out in paragraphs 5 and 6 of IT-496, that is a trust could presumably be set up or be organized for social welfare, civic improvement, pleasure, or recreation or for any other purpose except profit, it is our view that by the very nature of a trust, most would have difficulty meeting the NPO requirement of being operated as an NPO on an annual basis. Most trusts would have difficulty meeting the condition that no part of its income, whether current or accumulated, may be made available for the personal benefit of any proprietor or member. This is so because a trust is generally constituted to hold or manage property for the benefit of one or more beneficiaries. However, having stated that, it is our further view that employee training trust funds are similar to purpose trusts and provided, among other factors, they spend their funds on furthering the non-profit purposes for which they were formed it is likely they could qualify as non-profit organizations.

Our review of the Training Trust Agreement indicates that such a trust would meet the condition set out in paragraph 2(a) of IT-496 that is be organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit. We are unable to confirm, however, that the trust is operated for non-profit purposes. To qualify for exemption, an association must not only be organized exclusively for non-profit purposes but it must in fact be operated in accordance with these purposes in each year for which it seeks exemption under paragraph 149(1)(l) of the Act. A determination of whether an association was operated exclusively for and in accordance with its non-profit purposes in a particular taxation year must be based on the facts of each case which can be obtained only by reviewing all of its activities for that year. Such a determination cannot be made in advance of or during a particular year but only after the end of the year. An association that qualifies for exemption in a particular year may cease to qualify in a subsequent year by failing to operate in accordance with one of the purposes specified in paragraph 149(1)(l) of the Act, by revising its objectives so that it is no longer organized in accordance with that provision or by otherwise failing to meet the requirements of that paragraph.

We note that organizations or entities which meet the Department's criteria for having been organized for a purpose other than profit, and which subsequently are operated in strict conformity with their own organizational documents, generally do not have difficulty with the retrospective operational test.

Contributions to a training trust fund, made pursuant to a collective agreement or other binding agreement to employees, may be deductible to an employer to the extent permitted by section 67 of the Act. However, the provisions of paragraph 8(1)(i) of the Act do not permit a deduction to an employee for amounts paid to a training trust fund or for amounts withheld at source by an employer and remitted to a training fund. The contributions withheld at source are not annual dues to maintain membership in a trade union nor dues of the type described in subparagraphs 8(1)(i)(i), (v) or (vi) of the Act. We are not aware of any provision in section 8 which permits an employee a deduction for contributions to a training trust fund. As the payments are contributions to a fund, they may not be considered fees for tuition as contemplated in subsection 118.5(1) of the Act.

It is our further opinion that since at the time of an employer's contribution no particular employee derives a benefit, no taxable benefit accrues to an employee at the time of the contribution. Similarly, no benefit accrues to employees as a result of contribution to the fund by a level of Government. However, whether or not an employee enjoys a benefit at the time training is received is a question of fact the determination of which can only be made on a case by case basis after an examination of all the facts of each particular individual's circumstances. It is our general view that in many cases the primary beneficiary of training may be the employer or the industry in general.  Such factors as course content, intent, job requirements and so forth determine which party is the primary beneficiary. Certain courses may only benefit the employees, i.e. job-finding skills or union bargaining skills. On the other hand, there is a presumption that courses taken during normal working hours, with employees being given time off with pay for that purpose, are usually for the primary benefit of the employer.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch