Some educational institutions and other organizations provide tuition assistance to family members of their employees. Historically, Canada Revenue Agency's treatment of such assistance required this benefit to be reported as taxable income to the employee. However, this summer, the law changed. I asked my colleague Natasha Miklaucic to provide an update on how organizations can allow employees to benefit from a new exemption under the Income Tax Act.
Question:What is the new exemption?
Natasha: Under the new exemption, an employee would not be subject to tax with respect to the receipt of free or reduced tuition for a member of his or her family. The employee would be able to benefit from this new exemption only if certain requirements are met.
Question:What are the requirements?
Natasha: There are four. First, the benefit provided by the organization must be enjoyed by an individual other than the employee, such as a child of the employee. Second, the tuition assistance benefit must be provided under a structured program to further education, as opposed to, for example, a program aimed at assisting an employee with financial obligations. Third, the employee and employer must deal with each other at arm's length, which includes looking at whether individuals are related at a particular time. The final requirement is that the tuition assistance benefit must not be a substitute for employee compensation.
Question:When does the new exemption apply?
Natasha: It applies retroactively to October 30, 2011. So, if the four requirements I mentioned are met from October 30, 2011 to present, then an 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, it is likely rare to have met all of the requirements during the entire retroactive period and, therefore, very few employees would be entitled to a tax refund.
Question:For organizations who have a tuition assistance program in place, what should they be doing now so that their employees can benefit from the exemption?
Natasha: They should review and tailor their benefits program and policy manuals to comply with the requirements. They should also review their employment agreements to ensure that there are not provisions in them that would disqualify employees from the new exemption. Moreover, organizations will need to understand the different reporting requirements, as the amount of assistance will no longer be part of an employee's T4, but will be included on a T4A for the recipient of the tuition assistance. For organizations who do have employees who can benefit from the new exemption for the retroactive period, there are specific filing requirements to follow. I would be happy to provide further details to organizations, as the action plan would need to be tailored on a case-by-case basis.
Question:Can you point out one last thing that organizations will need to be careful about so their employees can pay less income tax?
Natasha: Yes, they need to be careful of offering assistance based on different levels. For example, providing a different amount of tuition assistance based on whether an employee is full-time, part-time or casual or whether an employee is an executive or not. Such tiered assistance may prompt the CRA to perceive the benefit received as a substitute for employee compensation. The structure of the tuition assistance is important as all four criteria must be met.
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