With rapidly-changing technology, the electronic business revolution, and a quickly-expanding global market, it is necessary for most individuals to constantly upgrade their knowledge and skills in order to remain competitive. Many employers consider it to be an absolute necessity to encourage and support training of their employees at all organizational levels. Employer-paid training is usually directly related to job responsibilities; however, some is clearly for the principal benefit of the employee.
The following article, based on a private letter issued by Revenue Canada in July 1999, offers some general comments regarding the income tax treatment of various forms of "education support" provided by employers to employees.
As a basic principle it must be noted that in determining the amount of income from an office or employment, the Canadian Income Tax Act (the "Act") requires the inclusion of the value of any kind of benefits received or enjoyed "... in respect of, in the course of, or by virtue of an office or employment..." unless they fall within certain qualified exceptions. The Act also requires the inclusion of "all amounts received in the year as an allowance for personal or living expenses or as an allowance for any other purpose" unless it falls within some limited exceptions. The word ‘allowance’ is not defined in the Act. Generally, an allowance is any periodic or other payment that an employee receives from an employer, in addition to salary or wages, without having to account for its use.
Tuition fees are addressed in paragraphs 18 and 19 of Revenue Canada’s Interpretation Bulletin IT-470R, Employee’s Fringe Benefits, which discusses employment benefits under paragraph 6(1)(a) of the Act. Paragraph 18 of IT-470R states that where an employer has paid tuition fees on behalf of an employee or has reimbursed an employee, in whole or in part, for tuition fees paid by the employee personally, the amount paid should be included in the employee’s income for the year in which the payment was made. Paragraph 19 of IT-470R provides an administrative exception, granted by Revenue Canada, when the course is taken primarily for the benefit of the employer.
Revenue Canada's Technical News Number 13, issued on May 7, 1998, announced new guidelines that assist in the determination of whether employer-paid educational costs are to be considered a taxable benefit. The first paragraph of Technical News Number 13 states that Revenue Canada has reviewed its guidelines on employer-paid educational costs in relation to employment benefits. These are discussed in more detail below.
TUITION FEES AND SUPPORT FOR SUPPLIES
The new guidelines were effective as of May 7, 1998 and apply to all future assessments and reassessments in an arm’s length employee-employer relationship. This means that these guidelines generally apply to:
- all assessments and reassessments of the 1997 and subsequent taxation years, and
- all future reassessments resulting from an objection or appeal, or from a waiver filed prior to May 7, 1998.
The new guidelines consider three broad categories of training. Only training and educational costs which fall within the third category will be considered of primary benefit to the employee and thus remain taxable. All other training which falls into the first or second category will generally be considered to primarily benefit the employer and, therefore, be non-taxable.
Category 1: Specific Employer-Related Training - Non-Taxable
Courses which are taken for maintenance or upgrading of employer-related skills, when it is reasonable to assume that the employee will resume his or her employment for a reasonable period of time after completion of the course. Whether or not the course leads to a degree, certificate or diploma, and when the course is taken will not affect the taxation of the training.
Category 2: General Employment-Related Training - Non-Taxable
Other business-related courses, although not directly related to the employer’s business. Examples of this category would include stress or time management, employment equity, first-aid and language skills.
Category 3: Personal Interest Training - Taxable
Employer-paid courses for personal interest or technical skills that are not related to the employer’s business; for example, fees paid for a self-interest carpentry course.
The newsletter states that "Courses which are taken for maintenance or upgrading of employer-related skills, when it is reasonable to assume that the employee will resume his or her employment for a reasonable period of time after completion of the courses, will generally be considered to primarily benefit the employer and therefore be non-taxable. For example, fees and other associated costs such as meals, travel and accommodation which are paid for courses leading to a degree, diploma or certificate in a field related to the employee's current or potential future responsibilities in the employer’s business will not result in a taxable benefit."
It is the employer’s responsibility to determine whether on a case by case basis the reimbursed educational costs should be treated as non-taxable. Relevant documentation which has helped in the determination that the employer-paid training is non-taxable should be kept. The new guidelines do not necessarily apply in non-arm's length relationships or in specific examples which evidence that the benefit was in fact primarily for the employee. This will be the case, for example, if the employee and the employer have entered into an agreement under which the remuneration ordinarily paid to the employee is reduced in recognition of training costs incurred by the employer.
SUPPORT FOR LIVING EXPENSES
Employers often may also provide support for living expenses for employees attending educational institutions. This support could be provided as a reimbursement of specific expenses, a non-accountable allowance or an accountable advance.
In the Federal Court of Appeal decision, Attorney General of Canada v. Roland M. MacDonald (94 DTC 6262), the issue of allowance versus reimbursement was discussed in detail along with the leading precedential jurisprudence. It is now a well accepted principle that an allowance for tax purposes is (i) "an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost"; (ii) "will usually be for a specific purpose"; and (iii) "in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense." On the other hand, a reimbursement is considered to be a repayment made to a person with respect to an expense or loss incurred. Although the allowance must be a predetermined sum set without specific reference to an actual cost or expense, the Court commented in its decision that this did not preclude the amount from being determined with reference to a projected or average expense or cost.
An allowance is a round amount given to an employee to cover expenses that he will incur, such as travel or entertainment, on his employer’s behalf. The employee is not required to account to the employer later for what he has actually spent. If the employee accounts to the employer for his actual expenses, neither an initial advance given him by his employer nor any subsequent payment by the employer to reimburse him for his expenses is an "allowance". The scope for abuse of allowances is greater because the employee does not have to account for an allowance and large allowances might be given as a form of hidden remuneration. Hence the general rule that allowances form part of employment income.
If the living expense support is provided as a reimbursement of expenses or an accountable advance, the amount should not be taxable under the Revenue Canada administrative guidelines in Technical News Number 13. If the support is provided as a non-accountable allowance it should not be included in income as long as it is not primarily for the benefit of the employee and otherwise meets the conditions stated in Technical News Number 13. This will be a question of fact. An indication of whether the employer or employee is the primary beneficiary of the allowance might be in the degree of control the employer has over its use. For example, an agreement between the employee and the employer that the allowance is to be used for certain types of expenses, or a requirement that the employee confirm, though not by an itemized accounting, that he/she used the money in the manner intended, may provide support that the allowance is not primarily for the benefit of the employee.
ADDITIONAL ITEMS TO NOTE
It is the employer's responsibility to determine whether on a case by case basis the educational support costs should be treated as non-taxable. Relevant documentation which has helped in the determination that the employer-paid training is non-taxable should be kept.
Employees who have their eligible tuition fees paid for or reimbursed by their employer and have not received a taxable benefit are not entitled to claim the tuition tax credit. In addition the education amount is not available, in any case, when employees have their eligible tuition fees paid for or reimbursed by their employer or when they receive remuneration while taking training in connection with their duties of employment.
There is no maximum or minimum on the amount that can be incurred for education costs. However, from the employer's point of view, section 67 of the Act provides that no deduction shall be made "in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances." There is no standard or gauge to determine reasonableness and thus the courts may freely determine what is reasonable in any assessment raised by Revenue Canada that is appealed by the employer. Reasonableness in any situation can only be determined on a case by case basis.
For example, employer-paid tuition and related expenses, such as accommodation, for an employee to attend university at a far away location, when the same or similar education program is available nearby, may be unreasonable. In determining whether an individual expense is reasonable "in the circumstances" one would look to the amount sought to be deducted, the purpose of the expenditure, the nature of the expenditure, the similarity to, and amount of, other such expenses claimed, expenses of other employees or officers employed in a similar capacity, and so on.
If it is determined that education costs in respect of an employee are unreasonable, it may indicate that a non-arm's length relationship exists between the employee and employer or that the benefit was primarily for the employee. The amount of the benefit, therefore, may be taxable to the employee.
LOANS TO EMPLOYEES
Some employers provided interest-free or low-interest loans to employees to assist with their education costs.
Subsection 80.4(1) of the Act deems an interest benefit to have been received by an individual if, by virtue of the office or employment, or future office or employment of that individual, any person receives a loan or otherwise incurs a debt. Once a loan becomes subject to the provisions of section 80.4, it remains subject to those provisions for all taxation years as long as any part of it remains unpaid. The "prescribed rate" for the purposes of section 80.4 of the Act is defined in subsection 80.4(7) of the Act and is determined in accordance with sections 4300 and 4301 of the Income Tax Regulations. For more information on the application of subsection 80.4(1) of the Act, refer to Revenue Canada’s Interpretation Bulletin IT-421R2, Benefits to Individuals, Corporations, and Shareholders from Loans or Debt. The deemed interest determined at subsection 80.4(1) is required to be included in the employee's income under subsection 6(9) of the Act as a benefit received in the taxation year by the individual.
With some careful planning, employers can provide education support to employees that is both deductible to the employer and not taxable to the employees.
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The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
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