20 October 1998 Internal T.I. E9825487 - TAXATION OF TRAINING COSTS

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:

1. Is the tuition assistance provided by XXXXXXXXXX taxable?

2. Are the related allowances provided by XXXXXXXXXX taxable?

3. Can the students claim the tuition credit?

4. Can the students claim the education tax credit?

5. Should the educational institution issue a T2200 even when the fees have been paid by someone other than the student?

6. How should XXXXXXXXXX be reporting these amount?

Position:

1. Yes
2. Yes
3. Yes
4. No
5. Yes
6. On T4A's

Reasons:

1. & 2. Benefits funded under the EI Act will generally be taxable under 56(1)(r) of the Act.

Benefits funded under the CRF may be taxable as bursaries under paragraph 56(1)(n) of the Act.

3. Because the training assistance has been included in income, the subparagraph 118.5(1)(a)(v) would not apply to deny the credit.

4. The definition of "qualifying educational program" in subsection 118.6(1) excludes a program where the student receives, from an arm's length person, any allowance, benefit, grant or reimbursement for expenses in respect of the program.

5. When tuition fees are paid on behalf of a student, Form T2200 or T2202A should be issued to students who are enrolled in a qualifying program, whether or not it is actually the student who paid the tuition.

6. Income tax is required to be withheld from amounts taxable under paragraph 56(1)(r) of the Act, and these amounts should be reported on a T4A Summary and related T4A Supplementaries.

Income tax is not required to be withheld from amounts taxable under paragraph 56(1)(n) of the Act, although a T4A Summary and related T4A Supplementaries are required to be prepared

						October 20, 1998

	Winnipeg, TSO			HEADQUARTERS
	Dian Versluis			Karen Power, CA
	Technical Advisor			(613) 957-8953
	Revenue Collections
						7-982548

Taxation of Training Costs

We are writing in reply to your letter of March 26, 1998, concerning the taxation of various training benefits/allowances provided to clients by XXXXXXXXXX We have forwarded our reply with respect to XXXXXXXXXX under separate cover.

You have provided us with the following information:

• XXXXXXXXXX administers a program which funds clients for educational purposes. The clients receive allowances which allow them to pursue their education. The programs are designed to obtain or improve skills for purposes of securing future employment.
• Tuition fees and the cost of books are paid directly to the institutions attended by the students. In addition to tuition costs, clients are eligible to receive one or more of the following allowances depending on their personal circumstances:
  • Training Allowance - This allowance can range between $242.00 to $363.00 bi-weekly.
  • Training Allowance Living - This allowance is provided to students who attend classes and reside in a location other than their usual residence. The amounts paid are similar to those paid under the training allowance.
  • Training Allowance Child Care - The clients may receive an allowance for child care based on the number of children in need of care. The maximum claim is $20.00 per day per child.
  • Training Allowance Travel - The clients can receive a travel allowance for a trip to the location of their school and home at the end of their course or during scheduled breaks.
  • Training Allowance Commuting - The clients can receive an allowance for daily travel to and from school. The allowance may pay for bus passes or mileage to and from the training facility.
• XXXXXXXXXX obtains their funding through a regional bilateral agreement ("RBA") with Human Resources Development Canada ("HRDC"). Funding for benefits provided under the RBA comes from two different streams. A portion of the funding is received under the authority of section 63 of the Employment Insurance ("EI") Act and the remaining portion of funding is received from the federal government's Consolidated Revenue Fund ("CRF"), in which the terms and conditions are approved by Treasury Board.
• Individuals who receive funding under section 63 of the EI Act must meet one of the following eligibility requirements:
• individuals for whom a benefit program has been established (entitled to regular EI benefits)
• individuals who have had an insurance benefit end in the three years before applying for assistance, and
• individuals who have received maternity or parental leave benefits in a period that began no more than five years before applying for assistance.
• Individuals who do not meet the above requirements and who receive training benefits would be funded from the CRF.

You have asked the following questions relating to the above situation:

1. Are the tuition fees and costs of books paid directly to educational institutions taxable?

2. Which allowances should be included in income?

3. Are the students eligible for the tuition credit pursuant to section 118.5 of the Income Tax Act (the "Act")?

4. Are the students eligible for the education tax credit pursuant to section 118.6 of the Act?

5. Does the educational institution issue the student a T2200 or T2202A for the amounts paid on the student's behalf when the tuition fees are not paid directly by the student?

6. Which information slip should XXXXXXXXXX use to report taxable amounts?

Our Comments

Questions #1 & #2

Benefits Funded Under the EI Act:

In our view, all payments/allowances received by individuals or paid directly to educational institutions in the above situation, which are funded under the EI Act, would be taxable under paragraph 56(1)(r) of the Income Tax Act (the "Act"). This paragraph was included in Bill C-28, which received Royal Assent on June 18th, 1998. This amendment is retroactive to June 30, 1996, the date of coming into force of the EI Act and Revenue Canada will apply the amendment beginning with the 1997 tax year.

Paragraph 56(1)(r) of the Act subjects to tax various training-related amounts. Specifically, this paragraph includes in a taxpayer's income financial assistance received under Part II of the Employment Insurance Act, as well as similar financial assistance received from a government or government agency under the terms of an agreement with the Canada Employment Insurance Commission. As a result, recipients of financial assistance under Part II EI programs will be taxed regardless of whether the payments have been made directly by the federal government, a province or an organization under a devolution agreement.

Benefits Funded by the CRF:

It appears that amounts paid from the CRF stream of funding are not made under the EI Act and, consequently, would not be taxable under paragraph 56(1)(r) of the Act. All benefits paid from this funding stream must be examined on a case by case basis. Without knowing all the circumstances under which training funds are approved or the purpose of the individual payments, we can only advise that benefits purchased with CRF funds will likely be taxable as bursaries. An explanation follows:

Paragraph 56(1)(n) of the Act requires the inclusion into income of certain scholarships, bursaries and fellowships, with a $500 exemption. A bursary is defined in Webster's Third New International Dictionary as "a sum or varying amount given or granted to a needy student". In our view, the definition of a bursary is broad enough to encompass almost any form of financial assistance paid to a student to enable the student to pursue his or her education, including a payment based on the means or needs of the student. This can include the value of ancillary assistance such as travel assistance, lodging, books or equipment, dependant care and so on. It will be a question of fact to be determined based on a review of all surrounding circumstances as to whether a particular individual has received a scholarship or bursary that is to be included into the individual's income under paragraph 56(1)(n) of the Act.

A bursary usually applies to education at the post-secondary school level or higher but there are circumstances where bursaries can be awarded for education below the post-secondary school level. Scholarships and bursaries ordinarily assist the student in proceeding towards a degree, diploma, or other certificate of graduation. They may apply to academic disciplines or to trades (such as plumbing or carpentry). Normally, a student is not expected to do specific work for the payer in exchange for a scholarship or bursary.

Paragraph 56(1)(m) of the Act has been repealed effective for years commencing January 1, 1998. This paragraph provided for the inclusion in income of amounts received by individuals as training allowances under the National Training Act, except to the extent that they were paid for personal or living expenses while the taxpayer was away from home. However, it is our understanding the benefits paid by XXXXXXXXXX did not fall under the National Training Act.

Question #3

Under subparagraph 118.5(1)(a)(iii.1) of the Act, an individual may be prevented from claiming the tuition tax credit for tuition fees in respect of which the individual was entitled to receive a reimbursement or any form of assistance under a program of Her Majesty in right of Canada or a province designed to facilitate the entry or re-entry of workers into the labour force. However, this is not the case if the reimbursement or assistance is included in the individual's income.

In our view, provided of all of the other requirements of section 118.5 have been, an individual receiving training assistance which is taxable under paragraph 56(1)(r) or 56(1)(n) of the Act would be entitled to claim the tuition credit.

Question #4

In order for students to claim the education credit under subsection 118.6(2) of the Act, they must be enrolled in a "qualifying education program" as defined in subsection 118.6(1) of the Act. In general, the credit is not available to a student who receives any allowance, benefit, grant or reimbursement for expenses (other than as a scholarship, fellowship or bursary, prize for achievement in a field of endeavour ordinarily carried on by the student or loan granted in accordance with the Canada Student Loans Act or Student Loans and Scholarships Act of the Province of Quebec) from a person with whom the student is dealing at arms length.

In our view, the training assistance received by the individuals described above, under Part II of the EI Act or under the CRF will normally be considered allowances or benefits for the purposes of section 118.6 of the Act and the recipients would not be eligible for the education tax credit.

Question #5

When tuition fees are paid on behalf of a student, Form T2200 or T2202A should be issued to students who are enrolled in a qualifying program, whether or not it is actually the student who paid the tuition.

Question #6

Income tax is required to be withheld from amounts taxable under paragraph 56(1)(r) of the Act, and these amounts should be reported on a T4A Summary and related T4A Supplementaries.

Income tax is not required to be withheld from amounts taxable under paragraph 56(1)(n) of the Act, although a T4A Summary and related T4A Supplementaries are required to be prepared.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch