Tax court decides award was scholarship income to worker’s son
Taxable benefits were once again under scrutiny in the Tax Court of Canada (TCC). A recent appeal concerned a Dow Chemical senior tax specialist whose son, a university student, received a company award of $3,000 in 2004 as partial reimbursement of tuition fees.
The Canada Revenue Agency (CRA) included the payment in his father’s income, saying it was a taxable benefit, but the employee appealed, saying it was scholarship income to his son — and the court agreed.
Dow’s award program recognizes the scholastic achievement of children of eligible employees and provides financial assistance for up to 100 students each year who have a 70-per-cent average graduating from high school. The award can be renewed annually.
Dow originally treated the awards as income to the students but a CRA audit in 2004 said such payments should be treated as taxable income to employees as the Income Tax Act includes “the value of a benefit that was directly received or enjoyed by another person because of the taxpayer’s office or employment, including employer-provided scholarships to dependants of employees.”
The CRA also said some employer-provided scholarships can instead be included in the dependant’s income if they “help a certain number of children who are selected on the basis of their scholastic records or other achievements or qualities.” But the selection criteria “must be higher than the minimum entrance requirements for most post-secondary institutions; otherwise, any dependant who enters a post-secondary education program would qualify.”
In this case, the scholarship relieved the father of the obligation to fund his son’s education and while the CRA acknowledged the employee was not personally enriched by the award, it conferred a benefit upon the family.
But the father had no financial obligation as he did not have to send his children to university, said TCC Justice Eugene Rossiter, and while he may be proud of his son, “personal satisfaction does not translate into an economic advantage. Also… the taxation system taxes legal entities, which include persons and corporations, but it does not include families.”
The act states employee benefits included in income are those “of any kind whatever received or enjoyed by the taxpayer... in respect of, in the court of, or by virtue of an office or employment,” said Rossiter.
But the only person who is economically enriched is the son, said the judge. “It is his application for the scholarship and it is his education and his qualifications which make him eligible for the scholarship.”
The court also said the award was scholarship income to the son and both cannot be recipients of the award so “there is no possibility of double taxation.” Scholarships can be awarded for more than just scholastic achievement, said Rossiter, and Dow set the threshold level for the award.
This has been lost on the CRA as it became focused on a requirement level it thought was not realistic, he said. “It is not for the CRA to impose their view upon those who establish scholarships. The act does not state there is a certain academic threshold.”
Unless the act is amended, said Rossiter, “employer-provided scholarships should be taxed in the hands of the true recipient and beneficiary, which is the student.”
