12 October 1995 Ruling 9519423 - CHILD CARE FUND - TAXABLE BENEFITS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULING REQUESTED:

"That no union member will receive a taxable benefit, under any provision of the Income Tax Act, by virtue of their participation in this program"

Ruling request withdrawn and opinion issued.

Principal Issues:

1)Is the child care fund an Employee Benefit Plan?

2)Is the subsidized child care received by the participants out of the child care fund monies a taxable benefit, so that the value should be included in their income

Position TAKEN:

1)Based on the information provided we are of the view that the fund is an EBP and the subsidized child care is taxable pursuant to 6(1)(g). In the event that it is an ordinary trust the subsidized care would be a benefit taxable pursuant to 6(1)(a). The contributions to the fund by the corporation were made pursuant to its obligation to do so under the applicable collective agreements. The funds contained in the trust fund were to be used for the reasons set out in the collective agreement for the benefit of the employees of the corporation. The Union was the custodian of the funds, the funds were not the property of the Union in their own right.

Reasons FOR POSITION TAKEN:

Departmental position regarding EBP, taxable benefits and employer subsidized child care.

		951942
XXXXXXXXXX	D. Zion

Attention: XXXXXXXXXX

October 12, 1995

Dear Sirs:

Re: XXXXXXXXXX
Child Care Fund
Advance Income Tax Ruling Request

This is in reply to your letter of July 17, 1995 in which you requested an advance income tax ruling confirming that amounts paid out of the above-noted fund to subsidize pilot project participant's child care expenses would not be a taxable benefit to the participating employee. We also wish to acknowledge our subsequent telephone conversations regarding your submission (XXXXXXXXXX\Zion), as well as the additional documentation you have provided. On October 4, 1995, you advised that the advance income tax ruling request of July 17, 1995 has been withdrawn, and requested that we provide you with our comments concerning the tax consequences to an employee of employer subsidized child care.

In this regard, we are prepared to provide you with comments which are not binding on the Department.

As we understand the situation,

XXXXXXXXXX

XXXXXXXXXX

Our Comments

Generally, where an employer reimburses an employee or provides for the payment of all or a portion of an employee's child care expenses, the employee is considered to be in receipt of a taxable benefit pursuant to paragraph 6(1)(a) of the Income Tax Act (the "Act"). In a situation where the reimbursement or payment is provided through a trust arrangement, the income tax treatment of the benefits depends on the terms and characteristics of the trust. It is possible, that the department may consider such an arrangement to be an employee benefit plan (EBP) or an employee trust as defined in the Act. Further comments regarding the tax implications to both the employer and employee are contained in Interpretation Bulletin IT-502. In the case where a trust is established by an employer for the benefit of its employees in circumstances where employer contributions may revert back to the employer, we would usually expect that the arrangement would be regarded as an EBP as defined in subsection 248(1) of 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. With respect to the tax consequences of benefits received from a 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.

If, on the other hand, the fund is an ordinary trust, it is our 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. However, at the time that the fund reimburses an employee or provides for the direct payment of all or a portion of an employee's child care expenses, the employee is considered to be in receipt of a taxable benefit pursuant to paragraph 6(1)(a) of the Act.

We would note that expenses paid by the employer under either of the arrangements discussed above would be considered to be paid by the employee and deductible under section 63 of the Act to the extent they otherwise qualify.

We trust that this is the information that you require. Our account for the time spent on the advance income tax ruling request will be forwarded under separate cover.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch