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.
Principal Issues: The company plans to send three of its employees to school to obtain degrees related to the employer's business. The proposed contracts governing the arrangements provide for the payment by the employer of tuition fees and related educational supplies, and an interest free loan which to be repaid according to a payment schedule upon returning to work. One contract provides for a non-reimbursable living allowance to be paid to student "B".
Position: The company paid tuition fees and supplies are non-taxable to the employees. It is a question of fact whether the non-reimbursable living allowance paid to student "B" is a non-taxable benefit. The loans are subject to deemed interest benefit under section 80.4
Reasons: Technical News #13 guidelines provide that where employer-paid training which may have been a benefit under paragraph 6(1)(a) prior to the release of the newsletter, would now be a non-taxable benefit when the primary beneficiary is the employer. Such benefits includes fees and associated costs such as meals, travel, accommodation.
Although the Technical Newsletter does not refer to allowances under paragraph 6(1)(b), the allowance paid to Student "B" would not be taxable as long as the benefit is not primarily for the employee and this will be a question of fact. Evidence regarding who the primary beneficiary of an allowance is, may be in the degree of control as to how the allowance is to be used. As stated in A.G. v. MacDonald (94 DTC 6262), an allowance is (i) an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost; (ii) will usually be for a specific purpose; and (iii) in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense. In Gagnon v. The Queen (86 DTC 6179), the court stated that it is not necessary for the recipient of an allowance to have complete discretion as to how the money is spent.
XXXXXXXXXX 5-991006
D. Shugar
Attention: XXXXXXXXXX
July 29, 1999
Dear XXXXXXXXXX:
Re: Employer-Paid Education Costs
We are writing in reply to your letter of December 22, 1998, concerning the taxation of employer-paid educational costs for employees of XXXXXXXXXX (the "Company"), with respect to training contracts between the Company and three employees, referred to in your correspondence as students "A", "B", and "C". Copies of the proposed contracts were provided to us and are referred to, in respect of each student, as Contracts "A", "B", and "C" in this letter. In your correspondence to us, you indicate that the contracts may be changed before a final version is decided upon. In a telephone conversation on May 10, 1999 (Shugar/XXXXXXXXXX), you confirmed that the three students were already employed by the Company before the proposed training programs were established.
The relevant provisions of the contracts are as follows:
Contract "A":
The duration of the educational program for Contract "A" is thirty months. The student is required to work for the Company for at least three years immediately following completion of the program. The Company will provide at least one cooperative work experience term for the student during the time at school. The student's tuition will be paid directly to the educational institution by the Company or by reimbursement to the student once receipts are provided. The student will also receive payments as receipts are given to the Company for supplies related to the program. The total amount for "support for tuition" and "support for supplies" will be approximately $XXXXXXXXXX over the course of the study period. The student will also receive an interest-free "loan for living expenses" of approximately $XXXXXXXXXX over the course of the study period, paid evenly in bi-weekly payments, during the school year. The loan will be repaid by the student over 36 months commencing when the student returns to work. The Company will provide a T4 information slip to the student for the deemed interest benefit on the loan, using the prescribed interest rates for the periods the loan is outstanding. Any scholarships or bursaries or other educational awards the student receives may be retained by the student.
Contract "B":
The duration of the educational program for Contract "B" is five years. The student is then required to work for the Company for at least five years immediately following completion of the program. The provisions regarding tuition and supplies are the same as under Contract "A", except that the total expected to be paid will be approximately $XXXXXXXXXX as "support for tuition" and "support for supplies." The student will receive a living allowance of approximately $XXXXXXXXXX. Of that amount, 60% will be an interest free "loan for living expenses" which is to be repaid once the student starts to work for the company. In your proposed contract, you state that the remaining 40% of the living allowance is for "support for living expenses" and is not repayable to the Company. This is provided as a non-taxable benefit.
Should the student receive income from sources such as scholarships, bursaries or other education awards, 75% of the amount awarded would be deducted from the amounts paid to the student by the Company. In a telephone conversation on April 26, 1999 (Shugar/XXXXXXXXXX ), you explained that this would be done after the student's receipt of the award, by reducing the amount paid to the student as a "loan for living expenses" by 45% of the total award, and the "support for living expenses" by 30% of the total award. The loan for living expenses will be repaid by the student over 60 months commencing when the student returns to work. The Company will provide a T4 information slip to the student for the deemed interest benefit on the balance of the loan, using the prescribed interest rates for the periods the loan is outstanding.
Contract "C":
The duration of the educational program for Contract "C" is five years. The student is then required to work for the Company for at least three years immediately following completion of the program. The provisions regarding tuition and supplies are the same as under Contract "A", and the total expected to be paid as "support for tuition" and "support for supplies" will be approximately $XXXXXXXXXX. The student will also receive an interest-free "loan for living expenses" of approximately $XXXXXXXXXX over the course of the study period. The loan for living expenses will be repaid by the student over 36 months commencing when the student returns to work. The Company will provide a T4 information slip to the student for the deemed interest benefit on the balance of the loan, using the prescribed interest rates for the periods the loan is outstanding. Any scholarships or bursaries or other educational awards the student receives may be retained by the student.
Attached to each of the contracts you provided is an Appendix describing, in chart form, the implications of the education support and loans provided to the employees, as you understand them.
You are requesting confirmation that all educational costs paid by the Company pursuant to the three contracts are non-taxable in the hands of the employees.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the department.
In determining the amount of income from an office or employment, paragraph 6(1)(a) of the Income Tax Act (the "Act") requires the inclusion of the value of any kind of benefits received or enjoyed "... in respect of, in the course of, or by virtue of an office or employment..." unless they fall within the exceptions listed in subparagraphs 6(1)(a)(i) to (v). Paragraph 6(1)(b) of the Act requires the inclusion of "all amounts received in the year as an allowance for personal or living expenses or as an allowance for any other purpose" unless it falls within the exceptions listed in subparagraphs 6(1)(b)(i) to (ix), subsection 81(3.1) or subsection 6(6) of the Act. The word 'allowance' is not defined in the Act. Generally, an allowance is any periodic or other payment that an employee receives from an employer, in addition to salary or wages, without having to account for its use.
Tuition fees are addressed in paragraphs 18 and 19 of Interpretation Bulletin IT-470R, Employee's Fringe Benefits, which discusses employment benefits under paragraph 6(1)(a) of the Act. Paragraph 18 of IT-470R states that where an employer has paid tuition fees on behalf of an employee or has reimbursed an employee, in whole or in part, for tuition fees paid by the employee personally, the amount paid should be included in income for the year in which the payment was made. Paragraph 19 of IT-470R provides an exception when the course is taken primarily for the benefit of the employer.
Technical News #13, issued on May 7, 1998, announced new guidelines that assist in the determination of whether employer-paid educational costs are to be considered a taxable benefit. The first paragraph of Technical News #13 states that the Department has reviewed its guidelines on employer-paid educational costs in relation to employment benefits taxed under paragraph 6(1)(a) of the Act.
Tuition Fees and Support for Supplies:
The new guidelines are effective as of May 7, 1998 and will apply to all future assessments and reassessments in an arm's length employee-employer relationship. This means that these guidelines will generally apply to:
(i) all assessments and reassessments of the 1997 and subsequent taxation years, and
(ii) all future reassessments resulting from an objection or appeal, or from a waiver filed prior to May 7, 1998.
The new guidelines consider three broad categories of training. Only training and educational costs which fall within the third category will be considered of primary benefit to the employee and thus remain taxable. All other training which falls into the first or second category will generally be considered to primarily benefit the employer and, therefore, be non-taxable.
Courses which are taken for maintenance or upgrading of employer-related skills, when it is reasonable to assume that the employee will resume his or her employment for a reasonable period of time after completion of the course. Whether or not the course leads to a degree, certificate or diploma, and when the course is taken will not affect the taxation of the training.
Other business-related courses, although not directly related to the employer's business. Examples of this category would include stress or time management, employment equity, first-aid and language skills.
Category 3: Personal Interest Training - Taxable
Employer-paid courses for personal interest or technical skills that are not related to the employer's business; for example, fees paid for a self-interest carpentry course.
The newsletter states that "Courses which are taken for maintenance or upgrading of employer-related skills, when it is reasonable to assume that the employee will resume his or her employment for a reasonable period of time after completion of the courses, will generally be considered to primarily benefit the employer and therefore be non-taxable. For example, fees and other associated costs such as meals, travel and accommodation which are paid for courses leading to a degree, diploma or certificate in a field related to the employee's current or potential future responsibilities in the employer's business will not result in a taxable benefit."
It is the employer's responsibility to determine whether on a case by case basis the reimbursed educational costs should be treated as non-taxable. Relevant documentation which has helped in the determination that the employer-paid training is non-taxable should be kept. The new guidelines do not necessarily apply in non-arm's length relationships or in specific examples which evidence that the benefit was in fact primarily for the employee. This will be the case, for example, if the employee and the employer have entered into an agreement under which the remuneration ordinarily paid to the employee is reduced in recognition of training costs incurred by the employer.
Based on an understanding, and on the assumption that these are arm's length relationships, in our view, since these three employees are being trained for specific jobs in the employer's organization, the employer paid tuition fees and expenses of training would not be considered taxable.
Support for Living Expenses:
Article XXXXXXXXXX of Contract "B" describes a "Living Allowance" of approximately $XXXXXXXXXX which will be paid to Student "B" over the course of the five year study period. Of this amount, 40%, or approximately $XXXXXXXXXX , is referred to in article XXXXXXXXXX of the contract as "Support for Living Expenses". The contract states that it is not repayable to the Company and is provided as a non-taxable benefit. The remaining $XXXXXXXXXX of the Living Allowance is a loan and is discussed in the next section of this letter.
In the Federal Court of Appeal decision, Attorney General of Canada v. Roland M. MacDonald (94 DTC 6262), the issue of allowance versus reimbursement was discussed in detail along with the leading precedential jurisprudence. It is now a well accepted principle that an allowance for tax purposes is (i) "an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost"; (ii) "will usually be for a specific purpose"; and (iii) "in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense." On the other hand, a reimbursement is considered to be a repayment made to a person with respect to an expense or loss incurred. Although the allowance must be a predetermined sum set without specific reference to an actual cost or expense, the Court commented in its decision that this did not preclude the amount from being determined with reference to a projected or average expense or cost.
In his decision, Linden, J. A. quotes the definition of an allowance given by E. C. Harris, in Canadian Income Taxation (4th ed. 1985) at p. 108:
An allowance is a round amount given to an employee to cover expenses that he will incur, such as travel or entertainment, on his employer's behalf. The employee is not required to account to the employer later for what he has actually spent. If the employee accounts to the employer for his actual expenses, neither an initial advance given him by his employer nor any subsequent payment by the employer to reimburse him for his expenses is an "allowance". The scope for abuse of allowances is greater because the employee does not have to account for an allowance, large allowances might be given as a form of hidden remuneration. Hence the general rule that allowances form part of employment income.
In Gagnon v. The Queen (86 DTC 6179), the court held that the requirement that the funds must be at the complete disposition of the recipient was too restrictive. In the court's view, an amount qualified as an allowance for the purposes of paragraph 60(b) of the Act if the recipient is entitled to dispose of it completely for her own benefit, and that it was not relevant that she did not have complete discretion as to how the money was spent.
It is not clear, from the wording of Contract "B", whether the amount described as "Support for Living Expenses" is a non-accountable allowance as defined in Attorney General of Canada v. Roland M. MacDonald, a reimbursement of expenses, or an accountable advance.
In our view, if the amount is a reimbursement of expenses or an accountable advance, the amount would not be taxable under the guidelines in Technical News #13. If the amount is non-accountable allowance it would not be included in income as long as it is not primarily for the benefit of the employee and otherwise meets the conditions stated in Technical News #13. This will be a question of fact. An indication of whether the employer or employee is the primary beneficiary of the allowance might be in the degree of control the Company has over its use. For example, an agreement between the employee and the employer that the allowance is to be used for certain types of expenses, or a requirement that the employee confirm, though not by an itemized accounting, that they used the money in the manner intended, may provide support that the allowance is not primarily for the benefit of the employee.
Loans to Employees:
Each of your proposed contracts include an amount described as a loan for living expenses. The loans are interest free and each contract includes repayment terms. The contracts also state that the students will be issued T4s by the company for the deemed interest benefit in respect of their loan from the company, based on the Revenue Canada Statutory Rate.
Subsection 80.4(1) of the Act deems a benefit to have been received by an individual if, by virtue of the office or employment, or future office or employment of that individual, any person receives a loan or otherwise incurs a debt. Once a loan becomes subject to the provisions of section 80.4, it remains subject to those provisions for all taxation years as long as any part of it remains unpaid. The "prescribed rate" for the purposes of section 80.4 of the Act is defined in subsection 80.4(7) of the Act and is determined in accordance with sections 4300 and 4301 of the Income Tax Regulations. For more information on the application of subsection 80.4(1) of the Act, refer to Interpretation Bulletin IT-421R2, Benefits to individuals, corporations, and shareholders from loans or debt. The deemed interest determined at subsection 80.4(1) is required to be included in the student's income under subsection 6(9) of the Act as a benefit received in the taxation year by the individual.
A person who is a shareholder of a corporation or connected with a shareholder of a corporation, that has, in a taxation year, received a loan from the corporation will be required to include the amount of the loan in income for that year under subsection 15(2) of the Act, unless the loan comes within the exception provided under the Act. Persons connected with a shareholder are generally persons who do not deal at arm's length with the shareholder. For more information on the application of subsection 15(2) of the Act, refer to IT-119R4, Debts Of Shareholders and Certain Persons Connected with Shareholders. A deemed interest benefit, determined under subsection 80.4(2) of the Act, will also apply except to the extent the loan, or any part of the loan, has been included in income. IT-421R2 also describes the taxation of loans to persons connected to a shareholder. In our view, unless the students are shareholders of the company or connected with a shareholder, no part of the loans would be subject to subsection 15(2) of the Act.
The charts included in the appendices to your contracts should be revised to take into consideration the comments in this letter. The employees would not include the Support for Tuition and Supplies in income and would not have a deduction from taxable income for repayments. For Student "B", the Support for Living Expenses are not repayable according to your contract and so there should not be any amount entered under the repayment column.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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