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Back-to-school tax planning

With back-to-school season upon us, some of us may be feeling the pinch as we pay tuition fees for our university or college-bound children.
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Laurie Bissonette, FCPA, FCA, is a partner with KPMG Enterprise. She can be reached at 705-669-2521 or lbissonette@kpmg.ca

With back-to-school season upon us, some of us may be feeling the pinch as we pay tuition fees for our university or college-bound children. Your employees may be surprised to find that companies can help bear this cost by providing a tax-effective scholarship program for their children. Such programs can help attract and retain employees for both big and smaller business, since the scholarships are considered to be provided to the student, and are not taxed in the hands of the employee. This can be beneficial where the student is enrolled at a qualifying post-secondary institution and can claim the full-time education amount, as post-secondary scholarships, fellowships and bursaries received are fully tax exempt.

The Canada Revenue Agency (CRA) changed its policy after a 2008 court decision determined that awards paid under a company’s post-secondary scholarship program should not be a taxable benefit to the employees, but rather the amounts should be taxed in the student’s hands. This change was later adopted into the Income Tax Act and these kinds of programs have since become more popular.

If you’re thinking of introducing an employee scholarship program, you’ll have to ensure it meets certain criteria to qualify for favourable tax treatment. Private company owners should keep in mind that employees whose children receive the scholarships can’t own more than 50 per cent of the company’s shares — that is, scholarships awarded to children of shareholders won’t be able to benefit from this program. Also, the employee’s salary can’t “fund” the scholarship paid to the child. It’s important to note that this treatment applies only to scholarships for post-secondary education, not elementary or private school tuition.

An example of a qualifying program is the one in that led to the CRA’s policy change. In this tax case, a business established a program to recognize the scholastic achievement of eligible employees’ children and to encourage them to pursue post-secondary education. The program, which was available at no cost to the employees, covered the student’s tuition fees to a maximum of $3,000 a year.

To qualify for the award, the student had to be a dependent child of an employee and had to attend an approved university or college. The student was required to have an academic average of at least 70 per cent in his or her graduating year of high school. The business granted a maximum number of awards each year based on the applicants’ highest averages. The awards could be renewed annually for up to four years, provided the student maintained good academic standing.

The company that offered this particular scholarship program was a large multinational with many employees, and had detailed eligibility rules for its scholarships. But a business’ scholarship program doesn’t have to have all these bells and whistles as long as the program offers legitimate scholarships — the payment must be made to the student, not the employee, and can’t be a substitute for pay or benefits the employee would have otherwise received.

Back-to-school may be a good time to study your employee compensation package — you may learn that adding a scholarship program will get you “top marks” from your employees.




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