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.
Principal Issues: 1. Are sponsorships provided to students considered taxable income of the student and if so, when would the amount be required to be included in income? 2. Are meal allowances paid to employees required to travel on business time considered to be taxable income of the employee?
Position: 1. Determination of fact but likely yes. 2. Determination of fact but likely no.
Reasons: See below.
XXXXXXXXXX 2009-034893
W. Doiron
April 27, 2010
Dear XXXXXXXXXX :
Re: Student Sponsorships & Meal Allowances
This letter is in response to your letter dated November 19, 2009. In your letter, you requested our opinion on the taxable status of sponsorships provided to students and meal allowances provided to employees. We have summarized your comments with respect to the two issues identified.
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Student Sponsorships
It is stated in your letter that XXXXXXXXXX provides sponsorships to students (both employees and non-employees) in the second and subsequent years of health-related schooling. The student receives a flat amount XXXXXXXXXX with no stipulations as to what the money is to be used for nor any requirement for receipts. Upon completion of the student's schooling, the student must provide a year of work to XXXXXXXXXX for each year of sponsorship received, or repay the outstanding amount calculated on a pro-rata basis.
You ask whether the sponsorship is considered taxable income and if so, when the amount would be required to be included in income (i.e. year of receipt or year of work)?
Our Comments
We refer you to Interpretation Bulletin IT-340R, Scholarships, fellowships, bursaries, and research grants - Forgivable loans, repayable awards and repayable employment income, which deals specifically with student sponsorships as well as similiar awards and grants. Paragraphs 2 and 3 of IT-340R provide guidance on whether the sponsorship in question would be considered a forgivable loan or a repayable award and states as follows:
"2. In this bulletin,
(a) a "forgivable loan" is a loan which is made to enable the borrower to pursue an education or to carry out a research project and which the lender is committed to forgive if certain conditions are met by the borrower, and
(b) a "repayable award" is a scholarship, fellowship, bursary or research grant which the recipient is committed to return if certain conditions are not met.
3. In order to determine whether an amount is a forgivable loan or a repayable award, the rights and obligations flowing from the agreement between the grantor and the recipient must be examined. If the agreement under which an amount is paid gives rise at the time of payment to an enforceable debt, it is the Department's view that the amount is a loan. If the agreement specifies that the amount paid does not become a debt of the recipient unless the recipient fails to fulfil certain conditions, the amount is generally considered to be a repayable award."
The determination is a question of fact. As stated in paragraph 3 of IT-340R, in order to determine whether an amount is a forgivable loan or a repayable award, the rights and obligations flowing from the agreement between the grantor and the recipient must be examined. If the agreement under which an amount is paid gives rise at the time of payment to an enforceable debt, it is our view that the amount is a loan. If the agreement specifies that the amount paid does not become a debt of the recipient unless the recipient fails to fulfill certain conditions, the amount is generally considered to be a repayable award.
Paragraphs 4 to 7 of IT-340R outline the proper treatment for tax purposes for a forgivable loan as follows:
"Forgivable Loans
4. It is considered that a bona fide loan, whether forgivable or not, does not come within the terms "scholarship", "fellowship", "bursary" or "research grant" as used in paragraph 56(1)(n) or (o) of the Act.
5. Where an employee receives a forgivable loan from an employer on condition that the employee return to employment with the employer upon completion of the period of education (or the research project) for which the loan was given, the amount received as a loan generally is not income when received. If the loan (or part of the loan) is subsequently forgiven for the reason that the employment conditions are met, the amount forgiven constitutes employment income of the employee in the year of forgiveness under paragraph 6(1)(a) of the Act.
6. Similarly, where a taxpayer receives a forgivable loan from a person who is not the taxpayer's employer when the loan is made but who is the employer at the time of forgiveness, any amount forgiven because the employment conditions are met is employment income of the taxpayer in the year of forgiveness under paragraph 6(1)(a).
7. Where a forgivable loan has been taxed under subsection 15(2) in the hands of a shareholder, a subsequent forgiveness is not considered to be employment income even though the shareholder is also an employee at the time of forgiveness."
In summary, if the sponsorship is considered to be a bona fide loan, the sponsorship amount would not be included in the student's taxable income at the time of receipt. If the loan is subsequently forgiven because the employment conditions of the sponsorship are met, the amount forgiven constitutes employment income in the year of forgiveness under paragraph 6(1)(a). Note that the tax treatment would be the same whether or not the student was an employee at the time of receipt of the sponsorship.
If the employment conditions of the sponsorship are not met, then the student would still be required to repay the loan and any loan payments would not be deductible to the student similar to a normal loan arrangement.
However, based on the general information provided by XXXXXXXXXX , we are of the view that the sponsorship would likely be considered a 'repayable award'. Paragraphs 8 to 13 of IT-340R outline the proper treatment for tax purposes for a 'repayable award'. Note that there are two different tax treatments depending on whether or not the student was an employee of XXXXXXXXXX at the time the sponsorship was received.
If the student was not an employee at the time the sponsorship was received then the sponsorship would be included in the student's income in the year of receipt under paragraph 56(1)(n). As a result, the amounts included under paragraph 56(1)(n) would be subject to the scholarship exemption as computed under subsection 56(3).
As outlined in paragraph 9 of IT-340R, if the sponsorship is received by the student immediately before, during or immediately after employment with the employer then the student would be required to include the amount of the sponsorship into income in the year of receipt as income from an office or employment under subsection 5(1) pursuant to subsection 6(3). Note that amounts included under subsection 5(1) are not subject to the rules contained in paragraph 56(1)(n) and therefore are not eligible for the scholarship exemption.
Meal Allowances of Travelling Employees
It is stated in your letter that XXXXXXXXXX provides meal allowances to employees required to travel on business time (not overtime). The employees receive a per diem amount (breakfast - $XXXXXXXXXX , lunch - $XXXXXXXXXX , dinner - $XXXXXXXXXX ) and are not required to provide receipts.
You ask whether meal allowances paid to employees required to travel on business time are considered to be taxable income or a taxable benefit?
Our Comments
In general, paragraph 6(1)(b) provides that all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose are required to be included in computing the income of the taxpayer except where specifically exempted in that paragraph. Subparagraph 6(1)(b)(vii) provides specific conditions where an employer-provided meal allowance may not be required to be included in the taxpayer's income. Subparagraph 6(1)(b)(vii) states as follows:
"(vii) reasonable allowances for travel expenses (other than allowances for the use of a motor vehicle) received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling away from
(A) the municipality where the employer's establishment at which the employee ordinarily worked or to which the employee ordinarily reported was located, and
(B) the metropolitan area, if there is one, where that establishment was located,
in the performance of the duties of the employee's office or employment,"
The Act does not define reasonableness for purposes of this income exclusion. However, in our view the per diem amount that XXXXXXXXXX may pay to employees without documentation would be considered reasonable.
The terms municipality and metropolitan area are also not defined in the Act. In general, a municipality refers to a city, town or district, and a metropolitan area is the surrounding populated area integrated with a municipality (a major urban centre and its environs). Where an employee is travelling on business outside the municipality/metropolitan area where the employee normally worked/reported, a meal allowance received by the employee would not result in a taxable benefit.
Where an employee is travelling on business within the municipality/metropolitan area where the employee normally worked/reported, a reasonable meal allowance received by the employee would generally result in a taxable benefit. However, Income Tax Technical News #40 ("ITTN #40") provides an exception where in some circumstances employer-provided meal allowances paid in respect of travel within the municipality/ metropolitan area can be excluded from the employee's income. ITTN #40 states the following with respect to meal allowances paid for travel within the municipality/ metropolitan area:
"In some circumstances, employer-provided travel (including meal) allowances paid in respect of travel within the "municipality" or, if there is one, the "metropolitan area" can be excluded from income. Effective for 2009, the CRA will accept that these allowances paid for travel within the municipality or metropolitan area may be excluded from income if the allowance is paid primarily for the benefit of the employer. That is, an allowance may be excluded from income when its principal objective is to ensure that the employee's duties are undertaken in a more efficient manner during the course of a work shift, and where allowances paid are not indicative of an alternate form of remuneration."
In summary, if the per diem amounts received by the employee meet all of the conditions under subparagraph 6(1)(b)(vii) are met or the meal allowance meets the exception noted in ITTN #40, we are of the view that the per diem amounts are not required to be included in computing employment income.
We trust these comments will be of some assistance.
Yours truly,
Steve Fron
Acting Manager
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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