Principal Issues: [TaxInterpretations translation] (1) Is the reimbursement of tuition fees - including accommodation and travel expenses - by a corporation for the benefit of its sole shareholder - who is also an employee of the corporation - a taxable benefit under subsection 6(1) or 15(1) of the Income Tax Act?
(2) Are all the expenses paid by the corporation deductible from its income?
Position: (1) No. On the facts, this appears to be a bona fide commercial transaction where the corporation incurs the expense to earn business income.
(2) The tuition fees paid by the corporation - including accommodation and travel expenses - are an eligible capital expenditure of the corporation.
Reasons: The Income Tax Act; jurisprudence.
XXXXXXXXXX 2005-015280 François Bordeleau April 7, 2006
Dear Sir,
Subject: Request for technical interpretation - Training costs paid by a corporation on behalf of the employee/sole shareholder
This is further to your letter dated September 27, 2005, sent by email to the attention of Ms. Jackie Page of the Legislative Policy and Regulatory Affairs Branch. In your letter, you queried certain tax implications where training expenses are paid by a corporation for the benefit of its sole employee and shareholder.
RELEVANT FACTS
Your request for a technical interpretation states several facts, the most relevant of which can be summarized as follows:
- ABC Inc. (the "Corporation") is a Canadian-controlled private corporation ("CCPC") as defined in subsection 125(7) of the Income Tax Act (the "Act");
- The corporation carries on a business of XXXXXXXXXX;
- Bob is the sole shareholder of the corporation, owning 100% of the voting common shares;
- Bob, who has a strong XXXXXXXXXX background, is also an employee of the corporation and provides XXXXXXXXXX services on behalf of the corporation;
- The corporation has not paid any salary or bonus to Bob since the corporation commenced operations in XXXXXXXXXX;
- The corporation has annual sales of approximately $XXXXXXXXXX and annual taxable profits of $XXXXXXXXXX;
- In order to grow the business, the corporation wishes to enrol Bob in the XXXXXXXXXX Executive Master in Business Administration ("EMBA") provided by XXXXXXXXXX;
- The corporation would cover all costs associated with this program, including the following:
- Eligible tuition fees ranging from $XXXXXXXXXX to $XXXXXXXXXX as well as accommodation and meals at XXXXXXXXXX, costs related to school supplies and books, and travel costs to XXXXXXXXXX for XXXXXXXXXX weeks - for a total amount of $XXXXXXXXXX;
- Accommodation and travel costs of $XXXXXXXXXX which are not included in the above costs;
- The program is to start in XXXXXXXXXX and end in XXXXXXXXXX and is delivered in XXXXXXXXXX;
QUESTIONS
You would like answers to the following questions:
(1) Is the $XXXXXXXXXX expense incurred by the corporation deductible from the corporation's income?
(2) Are these expenses to be included, in whole or in part, in Bob's income?
(3) Is the $XXXXXXXXXX expense incurred by the corporation deductible from the corporation's income?
(4) Should all or part of these expenses be included in Bob's income?
ANALYSIS
The following analysis will address the issue of whether the educational expenses paid by the corporation - including incidental accommodation and travel expenses ($XXXXXXXXXX) - constitute a benefit to be included in Bob's income as a shareholder or as an employee of the corporation. If it is determined that no benefit is conferred on Bob as a result of the corporation paying the tuition fees, we will analyze the tax treatment to be accorded to the expenses incurred by the corporation. Finally, we will consider your contention that the corporation may claim a tax credit under section 118.5 for a portion of the tuition fees paid to XXXXXXXXXX.
(1) Do the fees constitute a benefit conferred on Bob?
In light of the jurisprudence in this area, where a shareholder - who is also an employee - receives a benefit from the individual’s corporation, it is necessary to examine all the facts to determine whether a benefit is conferred on the individual. If such a shareholder/employee receives a benefit that is not available to other employees of the corporation, the Canada Revenue Agency ("CRA") will normally consider that the benefit is conferred on the individual in the individual’s capacity as shareholder.
Similarly, if the benefit is available to all other employees of the corporation or if it is part of the remuneration paid to the individual, the CRA will consider that the benefit is conferred on the individual in the individual’s capacity as an employee.
However, before answering that question, it is necessary to determine whether a benefit was conferred on Bob by the corporation.
Generally, the CRA will not apply the benefit provisions - section 15 of the Act - to shareholders if the transaction in question is a "bona fide business transaction "1 . In other words, it is necessary to determine whether ABC Inc. would have made the tuition payment in the case of an arm's length employee or whether there are otherwise commercially legitimate reasons for the corporation to make the disbursement.
The Federal Court of Appeal in Youngman2 provides guidance on the analytical approach to be followed in determining whether a shareholder benefit is provided:
In order to assess the value of a benefit, for the purposes of paragraph 15(1)(c), it is first necessary to determine what that benefit is or, in other words, what the company did for its shareholder; second, it is necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder.
Amongst others, several cases have confirmed that the shareholder benefit provisions are inapplicable in bona fide business transactions, including Minister of National Revenue v. Pillsbury Holdings Ltd.3 In that decision, the Exchequer Court wrote:
[...] in my view, there can be no conferring of a benefit or advantage within the meaning of paragraph (c) where a corporation enters into a bona fide transaction with a shareholder. [...] It could not be intended that the Court go behind a bona fide business transaction between a corporation and a customer who happens to be a shareholder and try to evaluate the benefit or advantage accruing from the transaction to the customer. On the other hand, there are transactions between closely held corporations and their shareholders that are devices or arrangements for conferring benefits or advantages on shareholders qua shareholders [...] It is a question of fact whether a transaction that purports, on its face, to be an ordinary business transaction is such a device or arrangement.
The CRA adopted the bona fide business transaction test in Interpretation Bulletin IT-432R2:
If a transaction involving a corporation and a shareholder is a bona fide business transaction, there is no subsection 15(1) benefit to the shareholder. Normally, a transaction is considered to be bona fide when its terms and conditions are essentially the same as they would be if the transaction were entered into by parties dealing at arm's length.
In other words, where the CRA wishes to apply section 15 to a transaction, it must determine whether the expenditure was made in the best interests of the corporation and was, in fact, a legitimate business expense. For example, in Bird v. Canada4, the corporation reimbursed its sole shareholder for several expenses, including travel and meal expenses. The Court justified its conclusion not to apply section 15 to those expenses by saying that they were incurred for the purpose of earning business income. In other words, the Court held that those expenses were commercially bona fide and were not incurred because of the individual's shareholding.
In this case, we understand that the EMBA program is indirectly related to the corporation's business and will provide Bob with the necessary skills and abilities that will enable the corporation to develop new business opportunities. Obviously, our conclusion would be quite different in the case of training that is not related in any way to the employer's business.
It is not uncommon today for employers to pay the costs of training their employees for programs such as the EMBA. We therefore believe that section 15 should not apply in this case since the payment of tuition fees represents a bona fide business transaction. With respect to subsection 6(1) - the provision governing employee benefits - we also exclude its application for the same reasons.5
We confirm that this conclusion applies in respect of the total amount of costs paid by the corporation, including the approximate sum of $XXXXXXXXXX for accommodation and travel costs.
(2) What is the tax treatment of the amounts paid by the corporation?
Under Interpretation Bulletin IT-357R2, expenses of training - including those for travel, food, beverages, and lodging incurred during the training period - may be deductible as a current expense or may be an eligible capital expenditure.
An eligible capital expenditure is a capital expenditure incurred by a taxpayer for the purpose of earning income from a business carried on by the taxpayer, except for the following
- an expenditure on tangible property, whether or not it is depreciable (an immovable or land);
- an expenditure on depreciable intangible property;
- an expenditure on intangible property made for the purpose of earning tax-exempt income;
- any property in respect of which a deduction is allowed (other than an allowance for eligible capital property).
75% of a taxpayer's eligible capital expenditure goes into an account - the cumulative eligible capital amount - from which an annual deduction of 7% can be taken by the taxpayer in respect of their business.
The CRA considers training costs to be current expenses where the costs are incurred to maintain, update or upgrade an existing skill or qualification. Some examples of this are listed below:
- a professional development course required or recommended by a professional association to ensure professional standards are met;
- a tax course taken by a lawyer or accountant who is already qualified to work in the tax field, even if he or she has not been actively involved in tax work;
- a course on building materials, taken by an architect;
- a course on electronic ignition taken by the owner of a car repair shop.
At the same time, training costs constitute capital expenditure if the training provides an enduring benefit to the taxpayer, i.e. where a new skill or qualification is acquired. For example:
- a general practitioner who is upgrading to a specialist;
- a lawyer taking engineering courses not related to the lawyer’s practice;
- a taxpayer taking a university or other course to obtain a degree or other certificate;
- a university professor taking a course during a sabbatical to acquire a new skill needed for a sideline business.
In this case, the facts you have provided indicate that Bob has a strong XXXXXXXXXX background. We have assumed then that the skills Bob has acquired through the EMBA program will be new skills that will provide the corporation with a lasting benefit. We do not believe that the training expense in this case represents a current expense as it does not serve to maintain, update or upgrade improve an existing skill or qualification of Bob.
In addition, the corporation's eligible capital expenditure will include not only the portion of the tuition fees paid to XXXXXXXXXX - the sum of $XXXXXXXXXX - but also the sum of $XXXXXXXXXX paid by the corporation for Bob's accommodation and travel expenses during his trips to XXXXXXXXXX.
(3) Can the corporation claim a tax credit for the tuition fees paid to XXXXXXXXXX?
In your letter to us, you stated that the portion of tuition fees eligible for the tuition tax credit is approximately $XXXXXXXXXX. We are not sure whether that statement reflects the corporation's intention to claim that tax credit. In order to clarify the state of the law in this matter, we offer the following comments.
We are of the view that the corporation cannot claim the tuition tax credit provided for in section 118.5 in respect of all the training fees it pays for Bob. That tax credit is only available to an individual who incurs eligible tuition fees under that section. In addition, subsection 118.5(1) explicitly provides that the tuition tax credit may not be claimed by an individual where the fees were paid on the individual's behalf by the individual's employer and are not included in the individual's income for the year. Since we are of the view that subsections 6(1) and 15(1) should not apply in this case, Bob could not claim the tuition tax credit.
We hope that these comments are of assistance. Should you require any additional information regarding this letter, please do not hesitate to contact us.
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
ENDNOTES
1 The CRA's translation of the expression "bona fide business purpose" which is widely used in case law.
2 90 D.T.C. 6322 (F.C.A.), reversing 86 D.T.C. 6584
3 [1965] 1 Ex. C.R. 676
4 [2005] T.C.J. no 583
5 We accept that the corporation will benefit primarily from the payment of tuition fees, as this expense will enable it to generate business income through Bob, its sole employee.