Canada: Changes To The Taxation Of Tuition Assistance: How Educational Institution Employees Can Benefit From The New Exemption In Subparagraph 6(1)(A)(Vi) Of The "Income Tax Act"

Many private schools, independent schools, semi-private schools, universities and colleges across Canada provide some form of tuition assistance for family members (dependent children or spouses) of their employees. This assistance ranges from free to reduced tuition fees and helps the employee's family members access higher education. The assisting institution usually covers the cost of tuition only, while the employee or family member of the employee remains responsible for paying any non-instructional fees and purchasing books and other supplies.

Historically, the Canada Revenue Agency (the "CRA") treated the provision of free or reduced tuition as a taxable benefit to the employee, requiring the educational institution to attribute a fair market value (FMV) to this benefit. Recent  case law successfully challenged this position1  and subparagraph 6(1)(a)(vi) of the Income Tax Act (Canada) (the "ITA")2, which was passed into law June 26, 2013, legislatively overrules the CRA's position in certain circumstances. The legislative amendment states that where specified conditions are met, an employee benefit in the form of free   or discounted tuition for a family member of an employee is not subject to tax in the hands of the employee. This means that if you provide the family members of your employees with free or reduced tuition assistance and the conditions for the application of the exemption are met, you will not need to include the amount of the assistance in the employee's T4 as taxable income. Instead, you will need to report the FMV of this benefit as a bursary on a T4A slip for the family member. If the family member meets certain criteria, then this benefit might be excluded from tax altogether.3

In order to benefit from this new exemption, your institution will need to ensure the following four requirements are met. First, the benefit you provide must be enjoyed by an individual other than your employee. For instance, if you provide your employee with tuition assistance in order  to further his or her own education then this exemption does not apply (and therefore does not affect how the benefit was previously calculated and taxed). In order to benefit from the new exemption, the tuition assistance must be received or enjoyed by an individual other than the employee. The determination of who has received or enjoyed the benefit of your institution's tuition assistance program is highly fact-dependent and requires an examination of the specific facts and circumstances relevant to a particular employee.

Second, the tuition assistance benefit must be provided under a structured program to further education. This means that the benefit should  arise from a documented program that is  designed to assist the employee's family members to further their education and explicitly provides free or reduced tuition to accomplish this goal. Employer programs aimed at assisting an employee with family financial obligations will not qualify. The CRA takes the position that whether a program provided by an employer is designed to further education is factually dependent and will differ depending on the particular case.

Third, the employee and the employer must deal with each other at arm's length. The ITA provides rules that determine whether persons are considered to deal with each other at arm's  length. Specifically, under subsection 251(1) of   the ITA, non-arms length relationships will be determined by looking at whether or not individuals are related, whether or not there is a beneficial interest present (for instance, as between a taxpayer and a personal trust) and whether or not, as a question of fact, persons not related to each other are at a particular time dealing with each other at arm's length. Therefore, if your employee is also an owner or shareholder of the employing business then this tuition assistance exemption will not apply.

Fourth, the tuition assistance benefit mustnot be a substitute for employee compensation. To satisfy this final requirement, the free or reduced tuition assistance must not be a substitute or replacement for any of your employee's compensation or employment benefits. This means that the free or reduced tuition assistance must not be a negotiated term of employment or provided to employees as an optional benefit that can be substituted for another employment benefit.

Several institutions provide different levels of tuition assistance to family members of employees depending on whether or not the employee is a full-time or temporary faculty member or an administrative or support staff member. For instance, tuition assistance for family members of permanent faculty members is usually far greater than for family members of casual staff. This type of tiered assistance may prompt the CRA to perceive the benefit received as a substitute for employee compensation. It is important to structure the tuition assistance you offer to your employees' family members in a manner that reduces the risk that this benefit may be included in your employees' income.

Subsection 6(1)(1)(vi) applies retroactively to October 30, 2011. This means that if the four criteria described above have been satisfied from October 30, 2011 to the present, then your employee could be entitled to receive free or reduced tuition assistance for a family member throughout the entire period on a non-taxable basis. However, we expect that very few employees would have met all of the above criteria during the entire retroactive period, and therefore, very few would be entitled to a tax refund.

Qualifying for this new exemption means that your employees would pay less income tax as the tuition assistance benefit would no longer be included in their taxable income. To effect this change, you should obtain independent legal advice in order to tailor your institution's tuition assistance program and policy manuals to the requirements described herein. Some modification to existing program documents will most likely be needed in order to ensure that the free or reduced tuition assistance benefit for your employee's family member is not taxed in the hands of your employee. You may also need advice in ascertaining the specific filing requirements that need to be followed in order to revise prior tax reporting for the retroactive period in the few situations where the criteria were met for that period.

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