15 January 2007 Internal T.I. 2006-0216011I7 - Repayment of education

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: The deductibility of the repayment of education assistance by a taxpayer pursuant to an agreement entered into while an employee, which provided that the employer would provide such assistance while the taxpayer completed his residency requirements to become a doctor and, in return, the taxpayer agreed to return as an employee of the employer for the same length of time that the assistance was received or, failing that, repay the amount received.

Position: The repayments are deductible under paragraph 8(1)(n) to the extent of the amounts previously included in income as employment income.

Reasons: All of the conditions in paragraph 8(1)(n) are met, and, as well, the deduction is consistent with the policy in paragraph 9 of IT-340R.

		January 15, 2007

	Verification and Enforcement	HEADQUARTERS
	XXXXXXXXXX  TSO	J. Gibbons, CGA
(819) 458-3538
	Attention:  XXXXXXXXXX
		2006-021601

XXXXXXXXXX (the "Taxpayer")

We are writing in response to your memorandum dated November 27, 2006, regarding the income tax treatment of amounts repaid by the Taxpayer to XXXXXXXXXX (the "Former Employer"), pursuant to an agreement (the "Agreement") entered into between the parties entitled the "XXXXXXXXXX".

Under the Agreement, the Former Employer agreed to extend financial support to the Taxpayer throughout the time he would be completing his residency requirements in XXXXXXXXXX, and the Taxpayer agreed that, upon completion of his residency requirements, he would return to the Former Employer and provide full-time services for an equal length of time. The Agreement also provided that, should the Taxpayer be unable or unwilling to fulfil his return of service obligations, he would be required to pay back the full amount received under the Agreement, and it also provided that the financial support would be considered employment income.

Based on the facts outlined above, it is our view that paragraph 8(1)(n) of the Income Tax Act (the "Act") would apply to the amounts repaid by the Taxpayer to the Former Employer. Under this paragraph, a taxpayer is entitled to a deduction for amounts that the taxpayer reimburses to his or her employer or former employer if the following conditions are met:

i) the reimbursements are pursuant to an arrangement under which the taxpayer is required to reimburse any amount paid to the taxpayer for a period throughout which the taxpayer did not perform the duties of office or employment;

ii) the amounts were included in computing the taxpayer's income from an office or employment; and

iii) the total of reimbursements does not exceed the total of amounts received by the taxpayer for the period throughout which the taxpayer did not perform the duties of the office or employment.

As we understand it, your main concern is that the amounts paid to the Taxpayer may not constitute income from an office or employment, notwithstanding the fact that the amounts were reported by the Former Employer on T4 Slips. In our view, however, the Taxpayer's situation is analogous to the one described in paragraph 9 of IT-340R and, accordingly, his income was correctly reported as employment income. Paragraph 9 states that where a taxpayer, during or immediately after employment by an employer, makes an agreement by which the employer will pay for the taxpayer's education on condition that the taxpayer return to employment with the employer afterwards, the amounts so paid are employment income to the taxpayer under subsection 5(1) of the Act pursuant to subsection 6(3) of the Act, whether or not the taxpayer is committed to repay the employer if the employment conditions are not met.

For your information a copy of this memorandum will be severed using the criteria in the Access to Information Act and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the Taxpayer. Should the Taxpayer request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

If we can be of any further assistance, please feel free to contact the author at the above-noted number.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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