2014-0517111E5 Financial assistance for apprentices

Principal Issues: Are amounts received as financial assistance under the Program by individuals participating in an apprenticeship taxable to the recipient?

Position: Question of fact

Reasons: Where the amounts are provided through a program that is established under the Labour Market Development Agreement, the amounts appear to meet the criteria of subparagraph 56(1)(r)(iii) of the Act and would be included in income under that provision. Some of the financial assistance would be considered an earnings supplement under subparagraph 56(1)(r)(i) of the Act and some would be a bursary within the meaning of paragraph 56(1)(n) of the Act.

Author: Wirag, Eric
Section: 5(1); 56(1)(r)(i); 56(1)(r)(iii); 56(1)(n)

XXXXXXXXXX                                      2014-051711
                                                              Eric Wirag, CPA, CMA
                                                              (613) 670-9053

July 22, 2015

Dear XXXXXXXXXX,

We are replying to your letter of November 26, 2013, in which you asked whether financial assistance paid to clients of the apprenticeship portion of the Employment Program XXXXXXXXXX (the “Program”) would be taxable to the recipient. More specifically, you have asked whether the financial assistance would be included in a recipient’s income under subparagraph 56(1)(r)(i) or subparagraph 56(1)(r)(ii) of the Income Tax Act (the “Act”). We also acknowledge our telephone conversation of November 4, 2014, between members of the Income Tax Rulings Directorate, the XXXXXXXXXX and the XXXXXXXXXX. 

It is our understanding that the Program supports clients in achieving sustainable employment through a variety of measures, such as employment counselling, services, and financial supports. You state in your letter that clients meet eligibility for financial assistance through the Program based on a “means, needs and income test.” The Program is administered through various delivery organizations throughout the province, and the financial assistance is provided through these delivery organizations.

Our understanding is that under the apprenticeship program, the delivery organization will provide an eligible client with various supports while participating in an apprenticeship program. These supports can be paid to the client directly from the delivery organization or paid to a third party for the benefit of the client for living allowances, dependent care, transportation, essential work supplies, clothing, equipment, personal grooming, food, certifications, licenses and living out allowances if the client is required travel out of town to obtain required work experience (collectively “the assistance amounts”).

Our comments:

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

You have explained that the intention of the Program is to replace the employment programs and services funded under Part II of the Employment Insurance Act (the “EI Act”) and the employment programs targeting XXXXXXXXXX recipients. Additionally, the Program must meet all of the applicable legislative and regulatory requirements listed in XXXXXXXXXX of the Program Policy Manual, of which you provided an excerpt. The list of applicable legislative and regulatory requirements includes section 63 of the EI Act, the Canada-XXXXXXXXXX Labour Market Development Agreement (“LMDA”), and other legislative and regulatory requirements and agreements. However, it is unclear to us exactly how each program under the Employment Program XXXXXXXXXX was established, and which of the legislative and regulatory requirements are applicable to each program or type of financial assistance. Therefore, we are providing the following general comments to assist you.

Our understanding of the general requirements of fulfilling an apprenticeship is that the candidate must complete a combination of both classroom and on-the-job paid training. Although your letter did not discuss these requirements, we have assumed this to be the case for the clients who are participating in the apprenticeship portion of the Program.

Generally, where employment and vocational supports are paid to an employer, who subsequently pays the amounts as remuneration to an individual, the amounts received by the individual are considered income from employment for the individual, pursuant to subsection 5(1) of the Act. On the other hand, when these amounts are paid as financial assistance either directly to an individual or to a third party for the benefit of the individual, the amounts received by that individual would generally be included in the recipient’s income as government financial assistance under paragraph 56(1)(r) of the Act.

Paragraph 56(1)(r) of the Act requires that certain benefits and training-related amounts received by an individual in the year are to be added in computing income. Financial assistance paid to an individual or paid to a third party for the benefit of an individual is included in income under subparagraph 56(1)(r)(iii) of the Act if the financial assistance is provided under a program that is:

(i)   established by a government or government agency in Canada or by an organization, 

(ii)  similar to a program established under Part II of the the EI Act, and

(iii) the subject of an agreement between the government, government agency or organization and the Canada Employment Insurance Commission because of section 63 of the EI Act. 

The preamble to the LMDA states that the agreement is established between the XXXXXXXXXX and the Government of Canada, as represented by the Minister of Human Resources and Skills Development and the Canada Employment Insurance Commission.  It also states that the Government of Canada “is authorized under section 63 of the EI Act to enter into an agreement with XXXXXXXXXX to provide for payment of contributions towards the costs of benefits and measures provided by XXXXXXXXXX that are similar to employment benefits and support measures under Part II of the EI Act and consistent with the purpose and guidelines of Part II of that Act…” 

Therefore, based on the noted criteria in the preamble of the LMDA, it is our view that financial assistance provided under a program that is established by a government or organization and that is the subject of the LMDA meets the requirements of subparagraph 56(1)(r)(iii) of the Act, and the amounts would be included in the income of the client for the year under that provision. This would apply to amounts paid directly to the client or paid to a third party for the benefit of the client while participating in both classroom and on-the-job training components of their apprenticeship. This would apply to financial assistance for living supports, dependent care, transportation, essential work supplies, personal grooming, food, certifications and licenses that are paid directly to the client or paid to a third party for the benefit of the client.

Alternatively, amounts paid as earnings supplements are generally taxable under subparagraph 56(1)(r)(i) of the Act when they are provided under a project sponsored by a government or government agency in Canada to encourage individuals to obtain or keep employment. It is a question of fact whether the amounts that you have described are considered to be earnings supplements. Generally, the purpose of an earnings supplement is to increase for temporary periods, the income that an individual receives.  This could include an amount, other than an amount that would be considered employment income, that is paid to an individual or paid to a third party for the benefit of the individual under such a project or program that assists the individual in participating in an employment-related activity. 

As noted in paragraph 3.80 of Income Tax Folio S1-F2-C3: Scholarships, Research Grants and Other Education Assistance, paragraph 56(1)(r) of the Act can apply to benefit amounts regardless of whether the benefits or payments are provided by the Canadian federal government, another level of Canadian government or an organization under a devolution agreement.

Amounts received as or on account of a scholarship, bursary, fellowship or prize for achievement are included in income under paragraph 56(1)(n) of the Act. Although the term “bursary” is not defined in the Act, its meaning is broad enough to encompass almost any form of financial assistance that enables a student to pursue his or her education. To qualify as a bursary, the primary purpose of the assistance must be to assist an individual with furthering his or her education. Therefore, it is our view that the financial assistance provided to clients of the apprenticeship program while they are participating in a classroom component of their apprenticeship would likely be included in the income of the client pursuant to paragraph 56(1)(n) of the Act if paragraph 56(1)(r) of the Act does not apply.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate

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