2016-0644171E5 Training assistance for ABE

Principal Issues: 1.Is the deduction under paragraph 110(1)(g) limited to tuition assistance received for adult basic education? 2. In situations where the requirements of paragraph 110(1)(g) have not been met could there be a tuition tax credit available under subsection 118.5(1)? 3. Could assistance amounts that are received by individuals for items other than tuition (i.e., transportation, child care, books supplies) be considered social assistance such that it is included in income by virtue of paragraph 56(1)(u) and an offsetting deduction under paragraph 110(1)(f) is available?

Position: 1. Provided that all the other requirements of paragraph 110(1)(g) are met and the taxpayer cannot claim a tuition tax credit for the program, then the deduction will be available. The deduction in paragraph 110(1)(g) may also be available for amounts that are provided under a program established under the authority of the Department of Employment and Social Development Act and included in income pursuant to paragraph 56(1)(n). 2. Question of fact and yes, provided that the requirements of subsection 118.5(1) are met. The deduction in 110(1)(g) is not available where a tuition tax credit is available. 3. Paragraph 56(1)(n) is broad and would encompass almost any form of financial assistance paid to a student to enable the student to pursue his or her education.

Reasons: See analysis.

Author: D'Angelo, Sandro
Section: 56(1)(n), 56(1)(u), 56(1)(r), 110(1)(g), 110(1)(f), 118.5(1)

XXXXXXXXXX                                                                                                                                2016-064417
                                                                                                                                                        Sandro D’Angelo
August 9, 2016

Dear Mr. XXXXXXXXXX:

Re: Adult basic education and the deduction under paragraph 110(1)(g)

We are responding to your email dated April 22, 2016, and our various subsequent telephone conversations (D’Angelo/XXXXXXXXXX), in which you asked several questions about the deduction in paragraph 110(1)(g) of the Income Tax Act (“Act”) as it pertains to adult basic education (“ABE”) and various XXXXXXXXXX retraining programs.  You have also asked for guidance on whether certain assistance amounts paid to individuals would be considered social assistance payments.

You have stated that some programs are established under the authority of the Department of Employment and Social Development Act (“ESDCA”) (or a similar provincial program established under a labour-market development agreement) and some are established under Part II of the Employment Insurance Act (“EI Act”), while some government assistance programs are established under other financial assistance programs (i.e., Part II of the EI Act or the ESDCA does not apply).

You noted that one of the programs that is “entirely provincially funded,” provides training support to get people working again and provided the following link to the XXXXXXXXXX website XXXXXXXXXX(“Website”).  You mention that the idea of the program is that “XXXXXXXXXX”

The Website states:

XXXXXXXXXX

You have asked the following questions:

1.    Is the deduction under paragraph 110(1)(g) of the Act limited to tuition assistance received for ABE or is a deduction available for other forms of tuition assistance that furnish a person with skills for, or improve a person’s skills in, an occupation?

2.    In situations where amounts are to be included in income under paragraph 56(1)(n) of the Act (and where the requirements of paragraph 110(1)(g) of the Act have not been met such that a deduction in paragraph 110(1)(g) will not apply), could there be a tuition tax credit available under subsection 118.5(1) of the Act?

3.    Could assistance amounts that are received by individuals for items other than tuition (i.e., transportation, child care, books supplies) be considered social assistance and included in income by virtue of paragraph 56(1)(u) such that an offsetting deduction under paragraph 110(1)(f) of the Act is available?

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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Question 1

Is the deduction under paragraph 110(1)(g) of the Act limited to tuition assistance received for ABE or is a deduction available for other forms of tuition assistance that furnish a person with skills for, or improve a person’s skills in, an occupation?

Paragraph 110(1)(g) provides a deduction for an amount received by a taxpayer in a year that

*     is received by the taxpayer under a program referred to in subparagraph 56(1)(r)(ii) or 56(1)(r)(iii) of the Act (footnote 1) or a program established under the authority of the Department of Employment and Social Development Act,

*     is financial assistance for the payment of tuition fees that are not included in computing an amount for the tuition tax credit under subsection 118.5(1) of the Act for any taxation year, and

*     is included in the taxpayer’s income, and is not otherwise deductible in computing the taxpayer’s taxable income for the year.

Paragraphs 3.79 to 3.83 of Income Tax Folio S1-F2-C3: Scholarships, Research Grants and Other Education Assistance (“Scholarship Folio”), provide additional information with regard to the taxation of financial assistance under paragraph 56(1)(r). As stated in paragraph 3.80 of the Scholarship Folio, paragraph 56(1)(r) of the Act can apply to training benefit amounts (including allowances) for tuition, books, equipment, travel assistance, lodging or dependent care.

As indicated in paragraph 3.82 of the Scholarship Folio, ABE has been interpreted as primary or secondary level education or other similar forms of training.  The Budget 2001 Annex 7 Tax Measures; Supplementary Information, describes what is meant by ABE and states:

“Basic education is primary or secondary level education or other forms of training that do not currently qualify for the tuition tax credit. Some adult students who take basic education to upgrade their skills receive direct financial assistance from governments to pay their tuition fees. This tuition assistance must be included in income, and the tuition fees do not qualify for any tax relief.

The budget proposes that individuals may deduct, in computing their taxable income, the amount of tuition assistance received for adult basic education that has been included in their income.”

Additionally, in a CRA February 15, 2002, news release, an explanation of ABE was provided:

“ABE is primary-or secondary-level education or other forms of training that do not qualify for the tuition tax credit. This includes courses taken to:

*     finish high school
*     develop stronger literacy skills
*     upgrade secondary-school credentials to prepare you for specific occupations or fields of higher learning.”

In our view, this explanation still describes ABE as initially anticipated in paragraph 110(1)(g) of the Act. However, it is now our view that, provided that all the requirements of paragraph 110(1)(g) are met and the taxpayer cannot claim the tuition tax credit for the program, the deduction in paragraph 110(1)(g) is not limited to tuition assistance for primary or secondary level education (or other similar forms of training) and could apply to tuition assistance for other forms of training; as an example, training that furnishes a person with skills for, or improves a person’s skills in, an occupation.

As noted, the deduction in paragraph 110(1)(g) of the Act is not limited to amounts that are included in income by virtue of paragraphs 56(1)(r)(ii) or (iii) of the Act.  That, is the deduction in paragraph 110(1)(g) may also be available for tuition assistance provided under a program established under the authority of the ESDCA (such as the Canada Job Grant Program when included in income pursuant to paragraph 56(1)(n) of the Act). However, the deduction applies only to tuition assistance and not to other types of assistance a student may receive in connection with the student’s training.

Question 2

In situations where amounts are to be included in income under paragraph 56(1)(n) of the Act (and where the requirements of paragraph 110(1)(g) of the Act have not been met such that a deduction in paragraph 110(1)(g) will not apply) could there be a tuition tax credit available under subsection 118.5(1) of the Act?

You have indicated that there may be situations where financial assistance is received by taxpayers under a program that is not established under the authority of the ESDCA, such that the deduction under paragraph 110(1)(g) of the Act is not available. In this case, would a tuition tax credit under subsection 118.5(1) of the Act be available?  As mentioned, paragraph 110(1)(g) does not apply where the individual may claim a tuition tax credit in respect of the tuition assistance, and therefore, whether a tuition tax credit is available must be determined first.

An individual must meet the requirements of subsection 118.5(1) of the Act to qualify for the tuition tax credit. Our views on the tuition tax credit are discussed in Income Tax Folio S1-F2-C2, Tuition Tax Credit (“Tuition Folio”).

As indicated in paragraph 2.3 of the Tuition Folio, pursuant to paragraph 118.5(1)(a) of the Act, a student who is enrolled at an educational institution in Canada may be eligible to claim a tuition tax credit for eligible tuition fees paid in respect of the year to that educational institution, as long as the total of such fees exceeds $100 (in accordance with subsection 118.5(1.1)). Specifically, an educational institution in Canada whose tuition fees may be eligible for the tuition tax credit is an educational institution in Canada that is:

a)    a university, college or other educational institution providing courses at a post-secondary school level (subparagraph 118.5(1)(a)(i)); or

b)    certified by the Minister of Employment and Social Development (ESD) to be an educational institution providing courses (other than courses designed for university credit) that furnish a person with skills for, or improve a person’s skills in, an occupation (subparagraph 118.5(1)(a)(ii)).

As indicated in subparagraph 118.5(1)(a)(ii.1) of the Act and paragraph 2.7 of the Tuition Folio, tuition fees that are paid to a university, college or other educational institution in Canada must be in respect of courses at a post-secondary level. Alternately, as required in subparagraph 118.5(1)(a)(ii.2) of the Act, courses taken at ESD-certified institution, must be undertaken for the purpose of gaining or improving skills in an occupation and the individual must be 16 years of age by the end of the year (although the courses do not have to be at the post-secondary level).

Question 3

Could assistance amounts that are received by individuals for items other than tuition (i.e., transportation, child care, books supplies) be considered social assistance and included in income by virtue of paragraph 56(1)(u) of the Act such that an offsetting deduction under paragraph 110(1)(f) of the Act is available?

Paragraph 56(1)(u) of the Act includes in a taxpayer’s income, social assistance payments received in the year that are made on the basis of a means, needs, or income test except to the extent that such amounts are otherwise required to be included in the taxpayer’s income or the income of the taxpayer’s spouse or common-law partner. However, amounts included in a taxpayer’s income under paragraph 56(1)(u) are offset by a matching deduction under paragraph 110(1)(f) of the Act, such that there are no accompanying income tax implications related to this income inclusion other than it may possibly affect certain income-tested benefits.

The first requirement in paragraph 56(1)(u) of the Act is that the amount must be “social assistance.” The term “social assistance” is not defined in the Act. Social assistance generally means aid provided by a government or government agency (although it can be provided by another organization) on the basis of need. The second requirement in paragraph 56(1)(u) is that the payment must be “made on the basis of a means, needs or income test.”

However, as stated in paragraph 3.85 of the Scholarship Folio:

“Where the primary purpose of a payment is to provide assistance to enable a taxpayer to pursue an education and may therefore fall within the meaning of the term bursary for income tax purposes, the assistance should generally be included in computing the taxpayer’s income pursuant to subparagraph 56(1)(n)(i) rather than 56(1)(u).  The nature and characterization of an amount received by a taxpayer is a question of fact that must be determined on a case by case basis. See Simser, where funds received by a taxpayer, pursuant to the Special Opportunities Grant for Disabled Students with Permanent Disabilities, were considered a bursary and included in computing the taxpayer’s income under subparagraph 56(1)(n)(i) rather than paragraph 56(1)(u).”

Paragraphs 3.7 and 3.8 of the Scholarship Folio discuss the term “bursary” and state:

“3.7 Scholarships and bursaries are amounts paid or benefits given to students to enable them to pursue their education. The term bursary is not defined in the Act; however, its meaning is broad enough to encompass almost any form of financial assistance paid to enable a student to pursue his or her education. Bursaries can include amounts paid to defray living expenses, as well as amounts that are directly related to the cost of the education. The extent to which a student has discretion over the use of funds received will not affect its categorization as a bursary (see Simser v The Queen, 2004 FCA 414, 2005 DTC 5001).

3.8 Scholarships and bursaries usually apply to education at a post-secondary level or beyond, such as at a university, college, technical institute or other educational institution. However, there are circumstances where scholarships or bursaries are awarded for education below the post-secondary school level. Scholarships and bursaries normally assist the student in proceeding towards a degree, diploma, or other certificate of graduation. Scholarships and bursaries may apply to any field of study, including an academic discipline (such as the arts or sciences), a professional program (such as law or medicine), a trade (such as plumbing or carpentry) or skill (such as certified first aid and truck driver training courses). Normally, a student is not expected to do specific work for the payer in exchange for a scholarship or bursary.”

From the definitions of “social assistance” and “bursary,” it can be seen that a particular payment may have the quality of both social assistance and a bursary if it is paid to a student in financial need.

As noted, paragraph 56(1)(n) of the Act is broad and can encompass almost any form of financial assistance paid to a student to enable the student to pursue his or her education. Payments that are included in income under another provision (e.g., 56(1)(r) or 56(1)(n)) would not be included in income under paragraph 56(1)(u) of the Act.

Thus, if the primary purpose of the payments from the program are to provide financial assistance to students in need in order to further their education, then the amount paid is a bursary and would be included in income pursuant to paragraph 56(1)(n) of the Act. However, in the context of programs similar to the one you have asked about, if education assistance is paid as a supplement, replacement or part of social assistance payments, these payments may retain the nature of social assistance and would be included in income under paragraph 56(1)(u) of the Act. There would be a corresponding deduction in computing taxable income in accordance with paragraph 110(1)(f) of the Act. There may also be situations in which an individual receives both social assistance payments and a bursary from a government program or programs. In this situation, the social assistance payments would be included in income under paragraph 56(1)(u) and the bursary would be included in income under paragraph 56(1)(n).

It is a question of fact, to be determined from a review of all the information pertaining to a particular program, including the program eligibility, criteria rules and policies, whether a payment from a particular program is, for income tax purposes, social assistance, a bursary or something else.  In the context of programs of the type you have asked about, it is generally the provincial or territorial government or body that is administering the particular program that would determine the nature of the payment (e.g., as social assistance).

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

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  That is, financial assistance under a program established by the Canada Employment Insurance Commission under Part II of the Employment Insurance Act (56(1)(r)(ii)) or financial assistance under a program that is established by a government or government agency in Canada or by an organization, is similar to a program established under Part II of that Act and is the subject of an agreement between the government, government agency or organization and the Canada Employment Insurance Commission because of section 63 of that Act (56(1)(r)(iii)).

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