The perils of free tuition for private school
While both students and teachers are getting a break this Thanksgiving weekend, parents who teach at private schools have something extra to be thankful for. Those whose children are given "free" tuition might find themselves with a little relief from the taxman.
Just last month, the Canada Revenue Agency published three separate technical interpretations dealing with the taxability of employer-paid tuition or scholarships. The general rule governing the taxation of scholarships has been in flux in recent years.
Prior to 2006, only the first $3,000 received by a student annually for post- secondary scholarships was tax exempt. In 2006, the government fully exempted all post-secondary scholarships from tax. The following year, the exemption was again extended to elementary and secondary school scholarships.
While you would think this would settle the matter, deeming all scholarships to be completely tax-free, the issue has come up again with the release of recent CRA inquiries, all dealing with employer-paid tuition.
One of the technical interpretations involved the taxability of amounts when an employer provides a post-secondary scholarship program for dependant students of its full- and part-time employees. To qualify, students must meet certain pre-established criteria such as academic performance, letters of reference, as well as demonstrating community involvement and leadership.
This question was similar to the one addressed by the courts in a trio of tax cases decided last year concerning the non-taxability of scholarships awarded to students who received them from their parents' employers. In all three cases, the courts concluded that there was no taxable benefit to the employees since they had no obligation to support their adult children with post-secondary education.
In the technical interpretation, the CRA indicated that in response to the 2008 tax cases, it reviewed its existing policy on employer-provided scholarships, bursaries and tuition benefits. It concluded that such amounts can generally be considered tax-free, regardless of the criteria used to award the amount.
However, the CRA went on to say that this exemption would not apply to employer-provided scholarships for attendance at elementary or secondary schools, private or otherwise. These amounts would continue to be taxable as a benefit to the employee.
This was the issue troubling a private-school teacher who wrote to the CRA asking whether her children's free tuition can be considered tax-free. Apparently, the teacher's children were required to attend that private elementary/secondary school.
The CRA responded, quoting the Income Tax Act, that "the value of any benefits received or enjoyed by a taxpayer ... in respect of ... employment [must] be included in the taxpayer's income." Thus, the free tuition was indeed taxable.
David Spiro, a tax partner and litigator at Fraser Milner Casgrain LLP, which last week won the Canada Tax Litigation Firm of the Year award, says that while last year's three cases "did not specifically address scholarships for private school elementary and secondary education, the principles applied by the courts in those cases could arguably extend to scholarships for private school elementary and secondary education."
Any teachers up for a test case?