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22 February 2012 External T.I. 2011-0424601E5 F - Scholarships and bursaries paid by a firm
Principal Issues: 1. What are the tax consequences for a student who receives a bursary from a professional firm who has hired the student during the summer and who has made an employment offer to the said student when he will have completed his courses?
2. Will the reimbursement of tuition fees incurred by a student before being employed by a new employer represent a benefit conferred to that employee when the reimbursement occurs after the student starts working for that employer?
Position: 1. General comments provided. However, amounts are likely to be included under subsections 5(1) and 6(3), under paragraphs 6(1)(a) or 6(1)(b) or under subparagraph 56(1)(n)(i).
Reasons: 1. Question of fact.
2. The position taken in paragraph 18 of IT-470R does not apply because the tuition fees were incurred before the student started working for the employer. As such, the courses are not considered to have been taken primarily for the benefit of the employer.
Sylvie Labarre, CA
February 22. 2012
Subject: Bursaries and tuition reimbursement
This is in response to your e-mail of October 4, 2011 in which you asked us for our opinion on the tax treatment of scholarship or tuition reimbursement in two hypothetical situations.
Based on our understanding of the facts in your email, the first hypothetical situation is as follows:
- a student received a temporary job offer for a summer internship at a professional services firm. If the student was retained after that period, the student would receive a permanent job offer. As part of that offer, the firm would award the student a $2,500 bursary. The student would use this bursary to cover the costs of a program of studies Permanent employment would begin 12 months after the receipt and acceptance of the permanent job offer, i.e. when the student has completed the student’s studies.
You wish to know if the bursary is an amount that would be included by virtue of paragraph 56(1)(n) or if the amount of the bursary would be considered employment income.
Based on our understanding of the facts in your email, the second hypothetical situation is as follows:
- a law firm hires someone with a law degree. The firm reimburses the employee for the tuition fees for the law degree.
You wish to know if the amount received as a tuition reimbursement would be considered to be a taxable benefit to the employee or if that amount would not be a taxable benefit because the law school studies would be considered training principally for the benefit of the employer.
In order to answer your questions regarding the first situation, we have assumed that the amount received in this situation corresponds to what is described in paragraph 6 of Interpretation Bulletin IT-75R4.
In computing a student's income, a bursary, as described in paragraph 6 of Interpretation Bulletin IT-75R4, will form part of the amount described in subparagraph 56(1)(n)(i) of the Income Tax Act (the "Act"), except in the case of an amount referred to in paragraph 56(1)(q), an amount received in the course of business, and an amount received in respect of, in the course of or by virtue of an office or employment.
Based on our understanding of the facts of the first situation, the question is whether the bursary is a sum received in respect of, in the course of, or by virtue of an office or employment.
The $2,500 amount would be received in respect of, in the course of, or by virtue of an office or employment if the employer-employee relationship had been established at the time of payment (in which case, consideration should be given to the possible application of paragraph 6(1)(a) or 6(1)(b) to the facts, as discussed below) or if the amount was described in subsection 6(3).
The determination of the time when an employer-employee relationship is established in a particular situation is a question of fact that can only be resolved after a detailed study of all the facts surrounding that particular situation. Our Directorate does not conduct such an examination as part of a technical interpretation request. We cannot therefore give you a conclusion in that respect in this hypothetical situation. On the other hand, we have already stated (in the context of previous requests for interpretation) the possibility that we may consider, in certain situations, that an employer-employee relationship exists from the time an agreement is entered into between a student and the student’s employer.
If an employer-employee relationship is not established at the time of payment of the bursary, consideration should be given as to whether the $2,500 amount is described in subsection 6(3).
Paragraph 7 of Interpretation Bulletin IT-75R4 provides an example of a situation referred to in subsection 6(3). That paragraph reads as follows:
7. During or immediately after a period of employment, employees and employers sometimes make agreements under which the employer agrees to pay all or part of the employee's education costs on the condition that the employee returns to work for the employer when the education is completed. In such cases, the amounts so paid are employment income to the student under subsection 5(1) pursuant to subsection 6(3), and not bursary or bursary income within the meaning of subparagraph 56(1)(n)(i).
Similarly, the $2,500 amount could also be an amount received wholly or partially as payment of, in lieu of payment of or in satisfaction of an obligation arising out of an agreement made by the payer with the payee immediately prior to a period that the beneficiary was an officer of, or in the employment of, the payer and it is reasonable to consider that amount as being received as consideration or partial consideration for accepting the office or entering into the contract of employment. If that were the case or if the situation was described in paragraph 7 of Interpretation Bulletin IT-75R4, subsection 5(1) would apply in respect of the bursary in accordance with subsection 6(3) and the amount of the bursary would be required to be included in the employment income of the individual.
If the employer-employee relationship was not established at the time of the bursary payment and the amount was not described in subsection 6(3), the bursary would not be an amount received in respect of, in the course of, or by virtue of an office or employment. If none of the other exclusions in subparagraph 56(1)(n)(i) apply, the amount of the bursary would be included under that subparagraph.
On the other hand, if the employer-employee relationship was established at the time of the bursary payment, it would be necessary to determine whether the amount of $2,500 was an allowance under paragraph 6(1)(b) of the Act. If that were the case, the $2,500 amount would be added to the employment income of the individual.
In contrast, if paragraph 6(1)(b) did not apply, it would be necessary to determine whether or not the amount paid to the student resulted in a taxable benefit under paragraph 6(1)(a) in accordance with the position set out in paragraph 18 of Interpretation Bulletin IT-470R (Consolidated). According to that position, there would be no taxable benefit where the training was primarily for the benefit of the employer. On the other hand, there would be a taxable benefit if the training was undertaken principally for the benefit of the employee, which could be the case if the employee and the employer had an arrangement whereby the remuneration usually paid to the employee was reduced based on the training costs incurred by the employer for that employee. In this context, it is necessary, among other things, to determine whether the training was primarily for the benefit of the employer or the employee. Such a determination is a question of fact that can only be made after a complete analysis of the facts surrounding a particular situation.
As stated in the previous paragraph, where a determination must be made as to whether there is a taxable benefit under paragraph 6(1)(a) to an employee because of an employer's payment of education expenses of the employee, the position of the Canada Revenue Agency ("CRA") in this regard is set out in paragraph 18 of Interpretation Bulletin IT-470R (Consolidated).
In addition to the general position indicated in paragraph 18 of Interpretation Bulletin IT-470R, that paragraph contains guidelines that assist in establishing whether or not training costs give rise to a taxable benefit. However, as stated in paragraph 18, these guidelines may not apply where there is an indication that, in fact, the benefit is primarily for the employee.
In our view, the position and guidelines regarding specific training related to an employer's activities, set out in paragraph 18 of Interpretation Bulletin IT-470R (Consolidated), apply only where an employee registers for training during the employee’s period of employment, which is not the case according to our understanding of the facts relating to the second situation. Indeed, training courses taken by an individual before the individual starts a new job cannot be considered as training courses taken to maintain or improve skills related to the activities of the employer, that factor being an essential condition for determining whether courses are primarily for the benefit of the employer.
Thus, if an individual started a new job and if, after starting that new job, the individual was reimbursed for the education expenses incurred before starting that job, we are of the view that the reimbursement of the individual's education expenses would constitute a taxable benefit under paragraph 6(1)(a).
Furthermore, the inclusion of tuition reimbursement as a taxable benefit in the second situation may also be justified by the fact that it may potentially represent an arrangement between the employee and the employer for the remuneration normally paid to the employee to be reduced based on the training costs that the employer incurs for that employee.
These comments do not constitute advance income tax rulings and are not binding on the Canada Revenue Agency with respect to a particular situation.
Stéphane Prud'Homme, Notary, M. Fisc.
Reorganizations Section III
Income Tax Rulings Directorate
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