Principal Issues: Is an education allowance paid to an employee in respect of the employee's child exempt from income tax if the child lives at the employee's home while attending school?
Position: No.
Reasons: Under subparagraph 6(1)(b)(ix) of the Act, several requirements must be met for an education allowance to be exempt from income tax if paid to an employee in respect of the employee's child. One condition is that the child of the employee must be living away from the employee's domestic establishment while attending school.
XXXXXXXXXX 2010-037100 P. Waugh June 29, 2010
Dear XXXXXXXXXX :
Re: Education Allowance
I am writing in response to your letter of June 11, 2010 concerning the taxation of an education allowance paid to an employee in respect of a child of the employee. More specifically, you have enquired whether the education allowance paid to an employee is exempt from income tax if the child resides with the employee while attending school.
In the situation you described, the taxpayers are employees of a church that sent them to an overseas country to supervise the construction and set up of a health and wellness centre. The taxpayers' children are enrolled in an international school in the country and live with them in the same domestic establishment. The church pays the taxpayers an educational allowance to help with the tuition costs at the international school.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.
Subparagraph 6(1)(b)(ix) of the Income Tax Act (the "Act") excludes from inclusion in an employee's income, an allowance received from his or her employer in respect of the schooling of a child of the employee, provided all of the following requirements are met:
(a) The allowance is not in excess of a reasonable amount;
(b) The child is living away from the place of the employee's domestic establishment where the employee is required to live by reason of employment;
(c) The child is in full-time attendance at a school where the language primarily used for instruction is an official language of Canada that is primarily used by the employee;
(d) A suitable school that primarily uses the appropriate language for instruction is not available in the place where the employee is required to live; and
(e) The school the child attends primarily uses the appropriate language for instruction and is not farther from the place where the employee is required to live than the community nearest to that place in which there is such a school having suitable boarding facilities.
As noted in (b) above, one of the requirements that must exist for the education allowance to be exempt from income is that the child must be living away from the place of the employee's domestic establishment where the employee is required to live by reason of employment. Since the taxpayers' children are living with them, this condition would not be met and the education allowance would not be exempt from income.
You referenced one of our previous opinion letters on this topic (2003-0053501) dated February 12, 2004, in which we state "In our view, an allowance that is paid could be tax-exempt under subparagraph 6(1)(b)(ix) of the Act if the child boarded in a facility that was not operated by the school attended." In this respect, we would point out that a child of an employee is not considered to be "boarding" if they live at the employee's domestic establishment (the employee's home). This statement is meant to exempt a situation where a child of an employee lives away from the employee's home to attend school full time but boards at a facility that is not operated by the school attended. The important factor is that the child of the employee is still boarding away from the employee's domestic establishment.
The application of subparagraph 6(1)(b)(ix) of the Act is also discussed in paragraph 21 of Interpretation Bulletin IT-470R, Employees' Fringe Benefits which can be found on our website.
We trust these comments will be of assistance.
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch