Important: this tax-free benefit is for an employee’s FAMILY MEMBER (not the employee).
New Tuition Benefit: Tax-Free For Your Employees
“Historically, the Canada Revenue Agency (the “CRA”) treated tuition assistance for an employee’s family member as a taxable benefit to the employee and required the company to attribute a fair market value (FMV) to this benefit. The CRA’s position was successfully challenged in a recent court case, and is also overruled in certain circumstances by a legislative change to the Income Tax Act (Canada) (ITA) enacted on June 26, 2013. The legislative amendment provides that if four specific conditions are met, free or discounted tuition for an employee’s family member is not subject to tax in the hands of the employee. “
1) The tuition assistance benefit you provide must be enjoyed by an individual other than your employee.
“For instance, if you provide your employee with tuition assistance for job-related courses then this exemption will not apply (and your employee will have to include a taxable benefit in his/ her income). Determining who has received or enjoyed the benefit of your company’s tuition assistance program is a factual question that requires an examination of specific facts and circumstances.”
2) 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. Again, determining whether this condition is satisfied will depend on the particular facts and circumstances of the program.”
3) 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. For example, if the employee is also an owner or controlling shareholder of the employer then the tuition assistance exemption will not apply.”
4) The tuition assistance benefit 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.”