The last tax-free worker’s benefit?

National Post


While many employers offer their employees an array of benefits beyond their base salary, the ideal benefit from the employee's perspective is one that is non-taxable.

Unfortunately, non-taxable benefits are hard to come by. The Canada Revenue Agency (CRA) generally takes the position that nearly all benefits received "by virtue of employment" are fully taxable.

Judging by at least three separate cases heard in Tax Court this year, there appears to be one potential "tax-free" benefit remaining: scholarships awarded to employees' children to attend post-secondary education.

Consider the case of Kathy Okonski, an employee of the University of Western Ontario, who received $1,200 in 2004 to be used toward her daughter's tuition at Western. The amount was received under Western's "Dependents Tuition Scholarship Plan," which allows dependent children of certain employees to receive tuition scholarships from Western.

The scholarships are offered to qualified students for a maximum of four years of full-time registration at Western. To qualify, dependent children must be accepted into Western by satisfying normal admission requirements. For subsequent years, to be eligible for continued scholarships, they must maintain a minimum average of 70%.

The CRA included the $1,200 in Kathy's income as a taxable benefit by virtue of employment. Kathy appealed to Tax Court, arguing that the award should be considered a scholarship in her daughter's hands and thus be tax-free.

The CRA argued that the $1,200 wasn't a true "scholarship," since there were an unlimited number of potential scholarships, there wasn't a "real competition" for the scholarships," and that the 70% grade threshold for annual renewal was too low.

Instead, the CRA felt that the $1,200 was more properly classified as a taxable benefit arising from Kathy's employment at Western.

The judge summarized the issue as follows: Who enjoyed the benefit of the scholarship - mother or daughter? The judge contrasted this benefit with others, such as career counseling, vacation days and pregnancy leaves, whose purposes were to "contribute to employee satisfaction and career development."

The judge concluded that it was Kathy's daughter who was the primary beneficiary of the scholarship, since the purpose of the perk was to encourage the dependents of Western employees to pursue a post-secondary education at Western. And, since there is no legal obligation for parents to fund a child's post-secondary education, the primary beneficiary of Western's plan is the children. Therefore, the amount was non-taxable to Kathy.

The CRA has appealed but no court date has been set. The Federal Court of Appeal will be hearing two similar taxpayer victories on Dec. 9 in Toronto.