One of the perquisites frequently given to teachers at private elementary and secondary schools is the ability to send their own children to that school either for free or at a substantial discount.
The Canada Revenue Agency has always taken the position that free or discounted tuition is a taxable employment benefit to the teacher. The justification for this, as explained by the CRA in 2009, is that under the Income Tax Act, "the value of any benefits received or enjoyed by a taxpayer ... in respect of ... employment [must] be included in the taxpayer's income." The free tuition is considered a benefit.
But how should such a benefit be valued? That was the question before the Federal Court of Appeal in a decision released this past week dealing with the value that ought to be assigned to two teachers' discounted tuition for their kids.
Carroll Spence and David Ratcliffe are teachers at a Montessori School in London, Ont. They were each entitled to send their children to that school for half the standard tuition fees. For 2003, 2004 and 2005, they each declared as a taxable employment benefit the difference between the "actual overhead cost per student space available the school incurred in educating the children" and the employee tuition rate they had paid.
The CRA disagreed and reassessed them on the basis that their employment benefit should be the full fair market value of the education, minus the tuition they had actually paid.
The court testimony revealed that the school "enjoyed substantial benefits from having the (teachers') children attend the School, such attendance benefitting the School's recruitment of prospective students and retention of existing students." The school calculated the amount of the benefits enjoyed by the teachers as the difference between the discounted price charged by the school and the cost of providing education at the school, as calculated by the school and included that difference as a taxable employment benefit on the two teachers' T4 slips for the years in question.
The court wrote that the issue was not the cost to the employer of granting the benefit to the employees but rather the value of the benefit received by the employees. Take the following hypothetical example, provided by the CRA, which illustrates the inherent unfairness of the "cost method."
Consider three private schools that charge $10,000 in annual tuition and that each offers a $5,000 discount to their employees. The cost per student for school A is $5,000, school B is $10,000 and school C is $11,000. If the cost method was to be used to determine the taxable benefit, the value of the discount would be $0, $5,000 or $6,000 respectively, even though each employee enjoyed the same benefit -free tuition for his or her child.
As a result, the Court found that the value of the free tuition was simply the normal tuition fees, less the amounts actually paid.