Tax Treatment of Employer-Paid Education Costs in Canada

The Taxation of Employer-Paid Educational Costs for Courses
Leading to a University Degree, College Diploma, or a
Professional Designation
__________________________
Investigating the adequacy of the current tax treatment of
employer-paid educational costs in Canada
Anson Lee
July 8, 2016

i
ABSTRACT
This paper assesses the strengths and weaknesses of the current tax treatment of employer-paid
educational costs (EPECs) in Canada, explores what other jurisdictions have done in regards to
the taxation of EPECs, and analyzes practical alternatives to the current tax treatment. The paper
focuses on one particular subset of employer-supported training: assistance for employees to
undertake coursework leading to a university degree, a college diploma, or a professional
designation. This restricted scope should not be interpreted as a boundary to which employer-
supported training should be taxed. The discussions herein are applicable to other types of
employer-supported training. If it can be shown that the employee derives his or her own kind of
economic benefit from the employer-paid education, it should be fully taxable.
Proponents of the current treatment of EPECs in Canada premise their argument on the grounds
of international competitiveness. But, is this premise, in and of itself, sufficient in justifying
maintaining the status quo? This papers attempts to deliver a more balanced view on this subject
matter by benchmarking this tax policy against other tax policy goals.
Jurisprudence has taken the stance that if the employee was in receipt of his or her own kind of
economic benefit from the employer-supported training, then the benefit should be taxable. There
are certain cases where the courts have also assessed the state of mind of the employee in seeking
the educational upgrading. The Canada Revenue Agency's current administrative position
emphasizes a different test in assessing taxability: the primary beneficiary test. This paper will also
reconcile these different standpoints.
The alternatives considered are: (a) the apportionment approach inspired from an Australian tax
ruling, (b) the cap approach, (c) the employer fringe benefit tax, and (d) the tax credit system
approach. It was then shown that the tax credit system approach appears to be well-poised for
adoption. To a large extent, the tax credit system approach would improve equity and neutrality.
With regards to the international competitiveness argument raised by proponents of the current
treatment of EPECs in Canada, the government can subsidize education through a direct spending
program rather than through a tax expenditure. For example, the government can support working
Canadians pursuing further education through a formal loan and/or grant program. Simply
allowing EPECs free rein on the basis of international competitiveness is, in and of itself, a poor
tax policy choice.

ii
TABLE OF CONTENTS
ABSTRACT..................................................................................................................................... i
TABLE OF CONTENTS................................................................................................................ ii
BACKGROUND ............................................................................................................................ 1
PURPOSE....................................................................................................................................... 1
SCOPE............................................................................................................................................ 1
WORKING DEFINITIONS ........................................................................................................... 1
CURRENT SITUATION IN THE CANADIAN LANDSCAPE................................................... 2
The law................................................................................................................................ 2
The Canada Revenue Agency's administrative practice..................................................... 4
ANALYSIS OF CURRENT SITUATION AGAINST TAX POLICY GOALS........................... 6
Horizontal equity ................................................................................................................ 6
Vertical equity..................................................................................................................... 6
Efficiency (or neutrality)..................................................................................................... 7
Economic growth................................................................................................................ 8
Administrative and compliance costs ................................................................................. 8
ANALYSIS OF THE TREATMENT OF EPECs IN OTHER JURISDICTIONS ........................ 9
United States of America.................................................................................................... 9
United Kingdom................................................................................................................ 10
Australia............................................................................................................................ 11
ALTERNATIVES TO CONSIDER ............................................................................................. 12
The apportionment approach ............................................................................................ 12
Imposition of a cap............................................................................................................ 13
The employer fringe benefit tax........................................................................................ 13
Use of the tax credit system.............................................................................................. 13
ALTERNATIVE VEHICLE WHERE THE EMPLOYER SUPPORTS THE EMPLOYEE ...... 14
Scenario: Use of a forgiveable loan.................................................................................. 14
DIFFICULTY IN THE DEFINITION.......................................................................................... 15
A BRIEF NOTE ON LINE-DRAWING...................................................................................... 16
CONCLUSIONS, RECOMMENDATIONS, AND NEXT STEPS............................................. 17
APPENDICES .............................................................................................................................. 18
BIBLIOGRAPHY......................................................................................................................... 19

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d
BACKGROUND
Renowned British economist Alfred Marshall once stipulated that "the most valuable of all capital
is that invested in human beings."1
Without doubt, investment in human capital is important for
the long-term survival of any business. In addition, corporations have long understood that
employees' fringe benefits are an indispensable tool in their arsenal when it comes to attracting
and retaining top talent. In Canada, 96% of all large businesses offer their employees opportunities
for education and special training, and 49% of all large businesses offer tuition assistance.2
As a
result of the prevalence of these particular fringe benefits, the value associated with the provision
of such benefits is expected to be large. These particular fringe benefits produce a significant
motivational effect for employees because they oftentimes yield dual-purpose benefits.
PURPOSE
The purpose of this paper is to shed light on the merits and drawbacks of the current tax treatment
of employer-paid educational costs (EPECs), particularly where such assistance is for employees
to undertake coursework leading to a university degree, a college diploma, or a professional
designation. Employees benefit personally from employer-sponsored degrees, diplomas, or
designations because longer-term benefits of a degree, diploma, or designation would accrue to
the employee.
SCOPE
In most cases, it is clear-cut whether the financial assistance provided by the employer are for the
benefit of the employer or for that of the employee. As such, the value of such an assistance would
either be non-taxable or taxable, respectively. The focus of this paper is on the EPECs for programs
where there exists a potential for dual-purpose benefits. Examples of such programs are ones that
lead to a university degree, a college diploma, or a professional designation. In this paper, I will
identify the gaps in the current tax treatment of EPECs, survey the treatment of EPECs in other
jurisdictions, and propose a set of alternatives that will close the gap to a certain extent.
WORKING DEFINITIONS
Employer-paid educational costs are expenses incurred by the employer as a result of offering
sponsorships to the employees for pursuing education. For the purpose of this paper, the term
"employer-paid educational costs" is applied in a more restrictive sense; referring to the financial
assistance provided by employers to employees to undertake educational courses leading to a
degree, diploma, or designation, unless otherwise stated.
A university degree or a college diploma is a post-secondary school level academic credential
granted by a provincially-recognized educational institution within Canada.

1
Alfred Marshall, "Earnings of Labour," Principles of Economics (London: Macmillan and Co., Ltd., 1920): 49, accessed on June 8, 2016,
http://www.econlib.org/library/Marshall/marP46.html.
2
"Annual BMO Labour Day Survey: How Are Canadian Businesses Retaining Talented Employees," BMO Financial Group, accessed June 6,
2016, https://newsroom.bmo.com/press-releases/annual-bmo-labour-day-survey-how-are-canadian-bus-tsx-bmo-201408280964920001.

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A professional designation is one granted by a professional organization. A professional
organization is one that draws power from federal or provincial legislation to make regulations
governing certification and licences to practise the profession, examination of candidates for
membership and the right to practise, and the institution of a professional code of conduct for its
members.3
The professional designation holder is an individual, in good standing with the
professional organization, who possesses the right and the licence to practise the profession.
Dual-purpose benefits refer to the benefits that would accrue to both the employee and the
employer, arising from the employer-sponsored university degree, college diploma, or
professional designation.
There are inherent difficulties in defining courses leading to a degree, diploma, or designation.
These difficulties are addressed in a later section of the paper.
CURRENT SITUATION IN THE CANADIAN LANDSCAPE
The law:
Before considering the Canada Revenue Agency's (CRA's) administrative practices, employees'
fringe benefits would generally fall within the scope of paragraph 6(1)(a) of the Income Tax Act
(ITA), and thus would be taxable in the hands of an employee. Two basic conditions must be met
for an amount to be taxable under paragraph 6(1)(a): firstly, the amount must be received or
enjoyed in the taxpayer's capacity as an employee, and secondly, the amount must result in a
benefit to the employee.4
EPECs would easily meet the first criterion because the employee
received the financial assistance from the employer by virtue of employment. However, the second
criterion poses a challenge because it must be shown that the employee benefitted from the
transaction. The reason for this challenge is because of the notion of dual-purpose benefits.
Courses leading to a university degree, a college diploma, or a professional designation serve two
purposes: (a) the courses may instil relevant knowledge into the employee that is subsequently
used in the workplace, and (b) the coursework towards a degree or diploma would also yield
personal benefits such as the "acquisition of a more diverse body of knowledge about the world,
the development of critical thinking skills that are used in all facets of everyday life, … and the
feeling of self-accomplishment and personal satisfaction."5
As a result of this notion of dual-
purpose benefits, this topic has been subject to great debate as to whether EPECs should give rise
to a taxable benefit. Perhaps, most importantly, the possession of a degree, a diploma, or a
designation significantly improves the earning potential of an individual. In a longitudinal study
commissioned by Statistics Canada, analyst Marc Frenette investigated the long-term labour
market premiums associated with a post-secondary education over a 20-year period (1991 –
2010).6
The findings of the study show that individuals who possess a bachelor's degree or a

3
I have chosen to use this definition of a professional organization, as interpreted by the CRA, for the purpose of this paper. This definition is
also consistent with jurisprudence. This definition appears in "Determining eligibility of an institution," Income Tax Folio S1-F2-C2 Tuition Tax
Credit, accessed June 30, 2016, http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f2/s1-f2-c2-eng.html.
4
Faubert v. The Queen, 1998, 98 D.T.C. 1380, [1998] T.C.J., accessed June 5, 2016, Federal Income Tax Collection Platinum Student Edition
(FITAC Platinum SE).
5
Kim Brooks, "Delimiting the Concept of Income: The Taxation of In-Kind Benefits," McGill Law Journal 49 (2004): 255, accessed June 8,
2016, http://lawjournal.mcgill.ca/userfiles/other/6294191-Brooks.pdf.
6
Marc Frenette, "An Investment of a Lifetime? The Long-term Labour Market Premiums Associated with a Postsecondary Education,"
Analytical Studies Branch Research Paper Series, no. 359 (February 2014): 5, accessed July 1, 2016,
http://www.statcan.gc.ca/pub/11f0019m/11f0019m2014359-eng.pdf.

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college diploma have more favourable labour market outcomes than individuals who only have a
high school diploma. Quantitatively, the earnings premium associated with a bachelor's degree
over the 20-year period ranges, on average, from $728,000 for men to $442,000 for women.7
For
a college diploma, the earnings premium is, on average, $248,000 for men and $180,000 for
women.8
This longitudinal study provides empirical evidence that there are significant long-term
benefits of post-secondary education that would largely accrue to the individual. Not taxing the
EPECs when received would blatantly ignore these obvious private benefits enjoyed by the
employee over the long term.
From case law, there have been a few court cases that have dealt with the taxability of such
benefits, and I have summarized the court decisions below.
In Sami v. The Queen, Mr. Jim Sami tried contesting the inclusion of the $28,700 of employer-
reimbursed tuition costs for an Executive MBA program into income. The court held that:
Although the purpose of the program was to improve the employer's
work force and to provide the incentive for its employees to improve
themselves for the employer's benefit, the appellant received his own
kind of benefit … [in that his] skills became much more marketable.9
This case was remarkable in that the judge did not rely on the well-acquainted primary beneficiary
test (i.e., whether the training was primarily for the benefit of the employer or employee). The
judge merely assessed whether or not the appellant received a personal economic benefit as a result
of the situation.
In Faubert v. The Queen, Mr. Steve Faubert, the appellant in the case, was an employee of then
Revenue Canada10
and had taken courses under the employer's policy of encouraging employees
to take courses outside working hours to enhance their academic qualifications and career
opportunities. Faubert commenced his coursework towards a Certified General Accountant (CGA)
designation in hopes of personal career advancement within Revenue Canada. Revenue Canada's
then policy was to reimburse all tuition costs related to the attainment of the CGA or Certified
Management Accountant (CMA) designation. The court noted that "the fact that an employer
encourages the upgrading of skills cannot be equated with a requirement to do so [emphasis
added.]"11
The court held that because the evidence did not suggest that Faubert would have been
disadvantaged if he had failed to upgrade his skills, the decision to seek educational upgrading was
purely personal in nature. The court reached the same conclusion in Jex v. The Queen.12

7
Frenette, supra note 6 at 5.
8
Ibid.
9
This court decision is consistent with the court decision rendered in Stevens v. Minister of National Revenue (93 D.T.C. 291; 1 C.T.C. 2429,
[1993] T.C.J.) Judge Mogan in the Stevens case argued that the appellant, who was an employee of Adventure Tours, received her own kind of
benefit from the free vacation. The appellant travelled to various global destinations to assist Adventure Tours in designing vacation packages,
however the court held that although Adventure Tours benefitted in the manner from having its employees take complimentary trips but such
benefit to Adventure Tours is not inconsistent with an employee like the appellant receiving her own kind of benefit from the free vacation. By
the same token, Judge Beaubier in this case argued that although the employer benefitted from Sami having taken the MBA program, Sami also
received his own kind of benefit from the degree.
10
The now Canada Revenue Agency was formerly called Revenue Canada, or the Canada Customs and Revenue Agency.
11
Faubert, supra note 4.
12
Jex v. The Queen, 1998, 98 D.T.C. 1377; 2 C.T.C. 2688, [1998] T.C.J., accessed June 5, 2016, Federal Income Tax Collection Platinum
Student Edition (FITAC Platinum SE).

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From the above, it is evident that the court scrutinized heavily on whether or not there was an
element of personal benefit derived from the transaction, and on the state of mind of the employee
in seeking the educational upgrading. In both cases, the court seemed to be hesitant to strictly apply
the primary beneficiary test13
without a comprehensive review of the surrounding facts and
circumstances. This is fundamentally different from the current administrative position adopted by
the CRA, who stresses the primary beneficiary test in assessing taxability.
The Canada Revenue Agency's administrative practice:
CRA's current administrative position on employer-paid educational costs is such that when
training is taken primarily for the benefit of the employer, there is no taxable benefit whether or
not this training leads to a degree, diploma or certificate.14
A taxable benefit arises when the
training is primarily for the benefit of the employee. This administrative policy has two exceptions:
it does not extend to non-arm's length employees or in cases where it is evident that remuneration
ordinarily paid to the employee is reduced in recognition of training costs incurred by the employer
(i.e., salary sacrifice arrangements).
Paragraph 18 of Interpretation Bulletin IT-470R (Consolidated) Employees' Fringe Benefits (IT-
470R)15
provides some useful guidelines to help employees and employers determine whether the
training gives rise to a taxable benefit. The CRA describes three broad categories of training: (a)
specific employer-related training, (b) general employment-related training, and (c) personal
interest training. The first two categories will not result in a taxable benefit, but the last one will.
Within the first category, the Interpretation Bulletin detailed that
Fees and other associated costs such as meals, travel and
accommodation which are paid for courses leading to a degree, diploma
or certificate, in a field related to the employee's current or potential
future responsibilities in the employer's business, will not result in a
taxable benefit. [emphasis added].16
The overarching idea is that there must be a logical and reasonable connection between the training
undertaken by the employee and his or her role within the employer's business. Determining
whether this connection is logical requires professional judgment on the employer's part. Within
the second category, general employment-related training includes other business-related courses
that may not be directly related to the employer's business (e.g., stress management, first-aid and
language skills). Within the third category, personal interest training includes employer-paid
courses for personal interest or technical skills that are not related to the employer's business (e.g.,
fees paid for a self-interest carpentry course). It is CRA's administrative position to consider
EPECs that falls within the third category to be a taxable benefit because the primary beneficiary
of this category of training is the employee.
Paragraph 19 of IT-470R clarifies that employees, who have their eligible tuition fees paid for or
reimbursed by their employer and have not received a taxable benefit by virtue of paragraph 18

13
The primary beneficiary or principal purpose test is often cited by the CRA in their guidelines on whether a benefit would be taxable or not.
More is discussed about this test later in this paper.
14
"Employer-paid educational costs," IT-470R (Consolidated) Employees' Fringe Benefits, accessed June 8, 2016, http://www.cra-
arc.gc.ca/E/pub/tp/it470r-consolid/it470r-consolid-e.html#P135_14575.
15
At the time of writing, Interpretation Bulletin IT-470R (Consolidated) Employees' Fringe Benefits has not yet been replaced by an Income Tax
Folio.
16
Canada Revenue Agency, supra note 14.

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discussed above, are not entitled to claim the tuition tax credit. Furthermore, the education tax
credit17
is not available, in any case, when employees have their eligible tuition fees paid for or
reimbursed by their employer or when they receive remuneration while taking training in
connection with their duties of employment.
This administrative policy originated from the Income Tax Technical News No. 13 (ITTN 13). In
multiple technical interpretations prior to the issuance of the ITTN 13 in 1998, the CRA has taken
the position that whenever the employer provides financial assistance by way of a reimbursement
or payment to the employee for courses that lead to degrees or professional designations, a taxable
benefit arises. In 1995, a technical interpretation regarding tuition fee reimbursement illustrated
clearly CRA's then position on this matter:
When courses are taken primarily to obtain a particular degree, whether
undergraduate or post graduate, the reimbursement or payment of the
corresponding tuition fees is a taxable benefit because the degree itself
is a personal asset of the student and not of the employer, albeit the
employer may also derive some secondary benefit [emphasis added.]18
As such, it is clear that CRA's prior position was that the employee received a personal benefit
because the subject matter (i.e., the degree) was considered to be a personal asset. This prior stance
is consistent with the case law previously described.
The issuance of the ITTN 13 on May 7, 1998 was a direct response to the public's dismay regarding
the CRA's then administrative position on EPECs leading to a degree, a diploma, or a certificate.
The public expressed great concern with CRA's decision to reassess the taxes payable of an
employee of IPSCO Inc.19
Senior metallurgist Fred Gezella faced a $30,000 increase in his taxes
payable because the CRA concluded that the employer-paid, steel-related, two-year Masters of
Business Administration (MBA) degree at the University of Pittsburgh gave rise to a taxable
benefit.20
This case is at the crux of the dual-purpose benefits debate. Since the MBA program was
steel-related, it can be argued that there was a logical and reasonable connection between the
training undertaken by the employee and his role within the employer's business. In addition, since
Gezella was in a senior role, an MBA would have enhanced his effectiveness at work where he
would presumably carry on some managerial duties. On the other hand, the MBA degree is
personal asset of the student – echoing CRA's prior administrative position – the student receives
his or her kind of economic benefit. Universities and corporations created public uproar and made
the argument that taxing EPECs would be poor social policy on the part of the federal government
and hurt Canadians' competitiveness on the global stage.
Some scholars have viewed this shift unfavourably because they believed the primary beneficiary
test does not provide a sound basis for assessing taxability:
The central question is not whether the employer benefits from the
provision of the services, but whether the employee derives a personal

17
At the time of writing, the new Canadian federal government announced in its 2016 Budget that it will eliminate the education and textbook tax
credits for the 2017 and subsequent taxation years, however the measure did not propose to eliminate the tuition tax credit.
18
Canada Revenue Agency, "Tuition Fee Reimbursement," External Technical Interpretation Inquiries 9521155 (E), October 1995.
19
Shawn McCarthy, "Ipsco battles Ottawa on taxing of training: Business fears Revenue Canada will discourage upgrading," The Globe and
Mail, February 18, 1998, accessed June 4, 2016, via Factiva, https://global.factiva.com/.
20
Ibid.

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benefit. In the case of university courses leading to a degree, personal
benefits are always present.21
This argument is consistent with case law and the technical interpretations prior to the issuance of
ITTN 13. The primary beneficiary test also provides a significant challenge for the government in
policing this administrative policy. It is an elusive endeavour to attempt to identify the primary
beneficiary in many of these cases as short-term benefits accrue to the employer, but long-term
benefits accrue to the employee.
ANALYSIS OF CURRENT SITUATION AGAINST TAX POLICY GOALS
Horizontal equity:
The principle of horizontal equity (HE) stipulates that equals be treated equally.22
Thus, two
individuals with the same ability to pay should bear the same tax burden. For the following HE
analysis, I have adopted the Haig-Simons comprehensive income base as the measure of the ability
to pay. Assume that there are two individuals who are employees of a large corporation. Employee
A earns $70,000 in salary and manages to have the employer cover one-half of the fee for an MBA
course (assume $5,000 represents one-half). Assume that the employer sponsorship qualifies as a
non-taxable benefit per IT-470R. Employee B earns $75,000 in salary, but does not want to pursue
further education. Using this information, refer to Appendix A for my analysis from a horizontal
equity perspective. Employee A would bear $11,859 in federal taxes payable, whilst Employee B
would bear $12,884. This results in a $1,025 difference. Given that a MBA program in Canada
costs, on average, $31,500,23
the potential difference in tax burden could be substantial to a
working Canadian.
As a result of the above analysis, CRA's current administrative policy surrounding EPECs is
horizontally inequitable. From a utility standpoint, it has been shown that training and continuing
education would elevate the earning potential of an individual and elevate the degree of access to
higher-quality employment opportunities.24
Employer-sponsored education has significant
downstream personal benefits. Not taxing the employer-sponsored tuition for a course that leads
to a degree, diploma or designation would be unjust on horizontal equity grounds.
On the other hand, the horizontal inequity argument is somewhat weakened in that if the degree
launches the employee into a higher-paying employment opportunity, the individual would
eventually have to pay more taxes in the long run.
Vertical equity:
The principle of vertical equity stipulates that an individual with a greater ability to pay should
bear a higher tax burden. Vertical equity is violated in this circumstance as well given that the tax
savings accruing to a high-income earner is likely to be greater than those accruing to a low-income
earner, ceteris paribus (see Appendix B for an illustration). This is because for a given tax-exempt

21
Brooks, supra note 5 at 284. Brooks discusses five reasons why the primary beneficiary (or principal purpose) test is normally not appropriate
for the taxation of employees' fringe benefits. They are discussed at 275.
22
Robin W. Boadway and Harry M. Kitchen, "Horizontal Equity," Canadian Tax Policy, (Toronto: Canadian Tax Foundation, 1984), 7-8.
23
I took a straight average of all the tuition costs of all the MBA programs in Canada (41 schools). See "Canada's M.B.A. programs: a variety of
options at 41 schools," Maclean's, accessed on June 4, 2016, http://www.macleans.ca/education/university/canadas-m-b-a-programs-a-variety-of-
options-at-41-schools/. The tuition information pertains to 2014.
24
Gordon B. Cooke, Isik U. Zeytinoglu and James Chowhan, "Barriers to training access," Perspectives on Labour and Income 10, no. 7 (July
2009): 15, accessed June 6, 2016, http://www.statcan.gc.ca/pub/75-001-x/2009107/pdf/10907-eng.pdf.

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EPEC amount, a high-income earner would enjoy a higher "tax saving" than a low-income earner,
simply because of the Canadian personal tax rate structure – high-income earners have higher
marginal federal personal income tax rates than low-income earners. This has negative
implications on the progressivity of the tax system because the non-taxability of these EPECs
would yield greater benefits to individuals in higher income brackets. As illustrated in Appendix
B, Employee C has a marginal federal personal tax rate (MFPTR) of 20.5%, whilst Employee D
has a MFPTR of 33%.25
The benefit of $5,000 in tax-exempt EPECs would be amplified by the
MFPTR of the taxpayer: Employee D would see a federal tax savings of $1,650, whilst Employee
C would see $1,025. Layering on the provincial piece, the difference in total tax savings could
reach $875. As such, this administrative policy is also vertically inequitable.
Furthermore, there is also evidence suggesting that low-wage and less-educated workers are less
likely to receive employer-supported training compared to high-wage and more-educated workers:
Employees with the lowest income (less than $30,000) reported the
lowest employer support for training. Household income affected the
odds in two ways: low income (less than $30,000) relative to medium
income ($30,000 to $59,999) reduced the odds by almost half (0.6). On
the other hand, high income ($60,000 or more) increased the odds
nearly 1.5 times.26
Research in other Organization for Economic Co-operation and Development (OECD) countries
have yielded similar results.27
Since higher-paid employees have better access to employer-
supported training, they are, therefore, much more likely to benefit from this fringe. The non-
taxation of EPECs under CRA's current administrative policy would, as a result, reduce the
progressivity of the tax system.
Efficiency (or neutrality):
A tax is efficient or neutral if it does not impact taxpayers' economic decisions – that is, the role
tax implications play in decision-making should be minimized.28
The current treatment of EPECs
is not likely to be neutral in that it may encourage employees to structure remuneration
arrangements to make them more tax-efficient. Although CRA places a caveat in its administrative
policy to deter such arrangements,29
it may be difficult to police, especially in the case of a new
hire. The employers would be indifferent because EPECs are deductible from the corporations'
perspective regardless.

25
Based on the federal personal income tax rates effective for the 2016 taxation year.
26
Cathy Underhill, "Training through the ages," Perspectives on Labour and Income 7, no. 10 (October 2006): 23, accessed June 26, 2016,
http://www.statcan.gc.ca/pub/75-001-x/11006/9502-eng.pdf.
27
As income increases the percentage of employees receiving fringe benefits increases (Australia, Finland, United Kingdom, United States), as
does the percentage of wages and salaries taken in the form of fringe benefits (Australia, Finland, Ireland, United Kingdom). For most benefits
their monetary value tends to increase as income increases. Jeffrey P. Owens, "The taxation of fringe benefits," Intertax 16, no. 3. (1988): 71,
accessed June 26, 2016 through University of Waterloo Library.
28
American Institute of Certified Public Accountants (hereinafter 'AICPA'), "Guiding Principles of Good Tax Policy: A Framework for
Evaluating Tax Proposals," (March 2001): 10.
29
The CRA recognizes situations where "the employee and the employer have entered into an arrangement under which the remuneration
ordinarily paid to the employee is reduced in recognition of training costs incurred by the employer." In these situations, the EPECs would be
considered a taxable benefit. In a technical interpretation from 2000, the CRA's position was that "if the salary reduction is made to account for
the employee's absence from the office while on training, it is likely that a reduction in the circumstances would not, in and of itself, cause the
[salary reduction] to be taxable. On the other hand, if the employee continues to work full-time, and it is clear that he or she has given up salary
in exchange for the reimbursement of training costs by the employer, the reimbursement of training costs would be regarded as ordinary
remuneration." See Canada Revenue Agency, "Employer - Paid Tuition," Internal Technical Interpretation Inquiries 2000-0043607 (E),
November 2000 for more details.

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There is also a line-drawing sub-issue with CRA's current position regarding new employees who
managed to have their past tuitions fees reimbursed by their new employers. In a technical
interpretation, the CRA detailed this differential treatment: "…Where an individual commences
new employment and is reimbursed for such tuition costs incurred prior to commencing
employment, the reimbursement by the new employer is a taxable employment benefit."30
Based
on Weisbach's principle of line-drawing,31
the line should be drawn so that economically similar
items are grouped together on one side of the line, and be treated similarly. If the delineation is
such that two economically similar items are on opposite sides of the line, then this situation is
likely going to result in significant efficiency costs. Assuming the university courses, for which
their costs were reimbursed, have direct relevance to the new employee's role and responsibilities,
the line drawn by CRA appears to be arbitrary. As a result, students may be enticed to join the
workforce right after secondary school in hopes of having its post-secondary tuition paid for
eventually by the employer, tax-free. This ill-drawn line can cause severe behavioural distortions
in the labour market. Based on the aforementioned two issues, the current policy does not appear
to be neutral.
Economic growth:
CRA's previous stance on the Gezella saga has raised eyebrows amongst the greater business
community. Universities and colleges offering continuing education programs, and businesses all
viewed CRA's previous stance unfavourably in that the federal government is effectively
discouraging businesses' investments in human capital.32
Many believed that CRA's previous
administrative position would make Canadians less competitive in this global village. One of the
goals of tax policy is that the "the tax system should neither discourage nor hinder national
economic goals, such as economic growth, capital formation, and international competitiveness
[emphasis added.]"33
CRA's previous administrative position would fall short of this tax policy
goal. In a study conducted by the Organization for Economic Co-operation and Development
(OECD) in 2012, Canada ranks 12th
out of 23 surveyed OECD countries in terms of adult
participation in employer-sponsored education (by occupation).34
This is a comparatively poor
ranking given that Canada sits right above the OECD average, and is underperforming in
comparison to countries like Finland (1st
), the United Kingdom (6th
), and the United States (7th
).
As such, CRA's previous administrative position could be seen to further exacerbate the situation
by discouraging employees from undertaking continuing education. This appears to be the only
reason why CRA eventually renounced its prior position and issued ITTN 13.
Administrative and compliance costs:
Administratively, CRA would be indifferent to treat EPECs as a (non-)taxable employee fringe
because the audit of EPECs would form a part of the larger assessments of taxable employees'
fringe benefits. The compliance costs incurred by taxpayers would also be low in these situations
because human resources could easily track the number of sponsorships granted and include them
in the T4s of the employees, similar to the process for other taxable fringe benefits. As such, the

30
Canada Revenue Agency, "Employer Reimbursed Tuition - Taxable Benefit," Interpretation - external 2004-0066031E5 (E), June 2004.
31
David A. Weisbach, "Line Drawing, Doctrine, and Efficiency in the Tax Law," Cornell Law Review 84, no. 6 (September 1999), accessed June
5, 2016, http://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2773&context=clr.
32
McCarthy, supra note 19.
33
AICPA, supra note 28 at 11.
34
Organization for Economic Co-operation and Development (hereinafter 'OECD'), "Education at a Glance 2015: OECD Indicators," (2015):
387, accessed June 9, 2016, http://www.oecd.org/edu/education-at-a-glance-19991487.htm.

- 9 -
tax policy goal of administrative and compliance simplicity with respect to the (non-)taxation of
EPECs would not be violated.
ANALYSIS OF THE TREATMENT OF EPECs IN OTHER JURISDICTIONS
United States of America:
Employers in the United States (US) have three alternatives to choose from with regards to EPECs:
sections 117, 127, and 132.35
In this way, the treatment of EPECs in the US is governed by statute,
unlike how it is presently silent in the Canadian ITA. Under section 117, gross income does not
include any amount received as a qualified scholarship by an individual who is a candidate for a
degree at an educational organization. There are two provisos to the applicability of this section,
as described in the Treasury regulations 1.117-4(c): (1) if the amount paid to an individual
represents either compensation for past, present, or future employment services, or (2) if the
amount paid enables him or her to pursue studies primarily for the benefit of the employer, then
the scholarship or grant amount would be taxable. This seems counterintuitive at first, but it should
be emphasized that the section governs the taxability of scholarships and grants. Scholarships and
grants are personal in nature in that they are financial assistance to aid the individual in his or her
own pursuit of knowledge. The spirit of the section is to reflect this.
Under section 127, gross income of an employee does not include amounts paid or expenses
incurred by the employer for educational assistance to the employee up to an annual maximum of
$5,250 USD. However, this section is less restrictive than section 117 in that: (a) employees do
not have to be enrolled in a degree program, and (b) the education, itself, does not have to be
related to the role or duties of the employee.
Lastly, the employee can receive working condition fringes tax-free. The term "working condition
fringe" is specifically defined under subsection 132(d), and means "any property or services
provided to an employee of the employer to the extent that, if the employee paid for such property
or services, such payment would be allowable as a deduction under section 162 or 167."36
In other
words, as long as the EPEC in question would have been deductible by the employee had he or
she paid for it himself or herself, then the provision of said property or service by the employer
would not give rise to a taxable benefit. Again, there are two caveats to the applicability of this
section, as described in the Treasury regulations 1.162-5(a): the education (a) must be relevant in
terms of maintaining or improving skills required by the individual in his employment or other
trade or business, or (b) must be taken to meet the express requirements of the individual's
employer, or the requirements of applicable law or regulations, imposed as a condition to the
retention by the individual of an established employment relationship, status, or rate of
compensation. Many court cases in the US regarding subsection 132(d) have shown that the
education taken by the employee must be connected with the employee's current duties and not
qualify the employee for a new position.37

35
Edmund D. Fenton, Jr., "Employer-Provided Education Benefits," Journal of Accountancy 198, no. 3 (September 2004): 49, accessed June 7,
2016, via Factiva, https://global.factiva.com/.
36
26 U.S. Code § 132(d), "Working condition fringe defined," Certain fringe benefits, accessed on June 8, 2016 via
https://www.law.cornell.edu/uscode/text/26/132.
37
Fenton, supra note 35.

- 10 -
In all, the tax treatment of EPECs appears to be more involved in the US than in Canada: the
provision of employer-paid formal education could fall within the scope of one or more of the
aforementioned sections. If the employee takes courses leading to a degree that would qualify the
employee for a higher position within the employer's business, it would appear that section 127
would apply. However, if the employee takes courses leading to a degree that has a direct
connection with the role and responsibilities attached to the current position, then it would appear
that subsection 132(d) would be a more favourable option for the arrangement. The interplay of
the provisions is clever. If the education provides a sizeable personal benefit to the employee (i.e.,
the skills of the employee become more marketable and qualifies the employee for higher-quality
employment opportunities), then EPECs would be subject to the $5,250 USD cap. However, if it
can be demonstrated that the courses taken were relevant to the current job, then there would be
no limit to the amount of EPECs that could be received tax-free.38
United Kingdom:
According to the United Kingdom Commission for Employment and Skills, only two in three
employers do any training.39
In response to this situation, EPECs are treated generously in the UK.
Part 4, Chapter 4 of the Income Tax (Earnings & Pensions) Act 2003 (ITEPA 2003) details the
statutory exemptions available for "work-related training" funded by employers. Work-related
training means "a training course or other activity designed to impart, instil, improve or reinforce
any knowledge, skills or personal qualities which are likely to prove useful to the employee when
performing the duties of the employment or a related employment."40
The scope of this definition
is broad and can include university courses.41
Similar to how EPECs are treated in Canada, it must
be demonstrated that there is a reasonable connection between the training and the duties of the
employee.
In the UK, salary sacrifice arrangements42
to fund course fees have become an attractive option
for employees wanting to pursue further education.43
These arrangements are beneficial if the
employer finds training costs unaffordable given the financial position of the business, but also
recognizes the benefits of a more motivated and knowledgeable workforce. Salary sacrifice
arrangements are attractive because it allows the employee to swap out taxable salary for tax-
exempt fringe benefits, thus reducing the overall tax bill. As mentioned previously, salary sacrifice
arrangements are treated unfavourably in Canada: in instances where "the employee and the
employer have entered into an arrangement under which the remuneration ordinarily paid to the
employee is reduced in recognition of training costs incurred by the employer," the CRA considers
this to be evidence that the benefit was, in substance, salary and thus taxable under subsection
5(1).44

38
Fenton, supra note 35.
39
United Kingdom Commission for Employment and Skills, "Skills in the Labour Market," Employer Skills Survey 2015 Summary Report, (May
2016): 11, accessed June 7, 2016,
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/525449/UKC004_Summary_Report__May_.pdf.
40
Part 4, Chapter 4, Section 251, Income Tax (Earnings & Pensions) Act 2003, accessed June 7, 2016,
http://www.legislation.gov.uk/ukpga/2003/1/part/4/chapter/4.
41
Baker Tilly UK Group LLP, "Salary sacrifice to fund course fees," (2010), accessed June 7, 2016,
https://www.leeds.ac.uk/arts/download/1490/salary_sacrifice_to_fund_postgraduate_study.
42
A salary sacrifice arrangement is struck between an employer and an employee so as to change the terms of the employment contract. The
change is normally a reduction in salary in exchange for some other non-cash fringe benefit. In ibid., an illustrative example is provided to
showcase how a salary sacrifice arrangement involving £5,500 could save an employee £2,876 in net cost.
43
Baker Tilly UK Group LLP, supra note 41.
44
Canada Revenue Agency, supra note 29.

- 11 -
Australia:
The tax treatment of EPECs in Australia bears some resemblance to the treatment of the "working
fringe benefits" in the US. As long as the expense in question would have been deductible by the
employee had he or she paid for it himself or herself, then the provision of said property or service
by the employer would not give rise to a fringe benefits tax (FBT). Unlike Canada and the other
jurisdictions surveyed above, the FBT imposed by the Australian Tax Office (ATO) is borne by
the employer, and not the employee. As mentioned, the imposition of the FBT on the employer
would highly depend on whether said expense would have been deductible by the employee. As
such, it is useful here to discuss the deductibility of these "self-education expenses."45
For the
employee to deduct the expense, the self-education cannot enable the taxpayer to get employment,
to obtain new employment or to open up a new income-earning activity.46
The ATO views these
expenses as being "incurred at a point too soon to be regarded as incurred in gaining or producing
assessable income."47
The ATO clarifies that there must be a logical connection between the
taxpayer's income-earning activities, the exercise of a skill or some specific knowledge, and how
the education would maintain or improve that skill or body of knowledge.
In a tax reform discussion paper issued in May 2013, the Australian Department of the Treasury
(Treasury) discussed the current treatment of EPECs and contemplated the implementation of a
$2,000 AUD cap on work-related education expense deductions.48
The cap functions to entice
working Australians to invest in work or business-related education, "while ensuring the deduction
is fair and does not provide an opportunity for people to enjoy significant private benefits at
taxpayers' expense."49
As described in the policy design of the cap approach, a FBT will not be
levied on training and education provided or reimbursed by an employer, unless such provision or
reimbursement is a component of a salary sacrificing arrangement.50
However, the public did not
view this change favourably, including all three largest accounting bodies51
in Australia from
whom consultation was actively sought. The accounting bodies argued that this was a poor policy
based on equity concerns, compliance costs, and practical implementation challenges.
Consequently, in November 2013, the new Australian government decided to repeal the previous
government's plans to implement the $2,000 AUD cap.

45
Per the guidance issued by the Australian Tax Office (hereinafter 'ATO'), self-education expenses are deductible by the employee when the
course leads to a formal qualification and meet the conditions below: "The course must have a sufficient connection to [the employee's] current
employment and either (a) maintain or improve the specific skills or knowledge [the employee requires] in [their] current employment, or (b)
result in, or is likely to result in, an increase in [the employee's] income from [their] current employment. [The employee] cannot claim a
deduction for self-education expenses for a course that does not have a sufficient connection to [their] current employment even though it (a)
might be generally related to it, or (b) enables [the employee] to get new employment." See ATO, "Self-education expenses," Income and
deductions (2016), accessed on June 7, 2016, https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Self-
education-expenses/ for more details. The spirit of these guidelines parallel that of those put forth by the CRA.
46
ATO, "Income Tax: Deductibility of Self-Education Expenses Incurred by an Employee or a Person in Business," Tax Ruling 1998/9, (June
1998): 15, accessed on June 7, 2016, http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR989/nat/ato/00001.
47
Ibid at 48.
48
This cap approach is analogous to the the $5,250 USD cap imposed under section 127 in the US. For more information on this discussion
paper, see The Australian Government the Treasury, "Reform to deductions for education expenses," (May 2013), accessed on June 7, 2016,
http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2013/Reform%20to%20deductions%20for%20e
ducation%20expenses/Key%20Documents/PDF/Discussion_Paper.
49
Ibid at 9. This rationale behind the policy design suggests that the Australian government is aware that individuals are claiming significant self-
education costs, and are cognizant that although self-education expenses render benefits to employers, there are undeniable inherent personal
benefits.
50
Ibid at 12.
51
The three largest accounting bodies in Australia are: Certified Practising Accountants of Australia (hereinafter 'CPA Australia'), the Institute of
Chartered Accountants in Australia (hereinafter 'ICAA'), and the Institute of Public Accountants (hereinafter 'IPA').

- 12 -
The then Institute of Chartered Accountants Australia (ICAA)52
issued a response to the above
discussion paper. Within the response, the ICAA suggested the use of the apportionment principle
as an alternative approach in tackling the problem raised by the Treasury.53
The Treasury was
concerned with the existing treatment of EPECs because it provides an opportunity for people to
enjoy significant private benefits at taxpayers' expense. The elegance of the apportionment
principle was that it was already extensively used in Australian case law in dealing with expenses
yielding dual-purpose benefits. The ICAA suggested that the Treasury and ATO join forces to
flesh out the criteria in greater detail with regards to how apportionment can be better used and
enforced, rather than adopting the cap approach. This apportionment principle adds an interesting
perspective to the discussion of EPECs. Apportionment of self-education expenses yielding dual-
purpose benefits was discussed in taxation ruling 1998/9:
If the income-earning purpose is merely incidental to the main private
purpose, only the expenses which relate directly to the former purpose
are allowable. If the private purpose is merely incidental to the main
income-earning purpose, apportionment is not appropriate. However, if
the apportionable expenditure is a single outlay that serves both an
income-earning purpose and some other purpose indifferently…, it
would be appropriate to apportion the expenses equally between the
purposes.54
Since this taxation ruling originated in 1998 with subsequent periodic updating, the radical
approach of instituting a $2,000 AUD cap appears to derail a well-established policy. It should be
noted that the apportionment principle applies to how an employee deducts eligible expenses. This
is because, unlike the Canadian tax system, self-education expenses are treated as deductible
employment expenses in Australia.
ALTERNATIVES TO CONSIDER
Based on the above analysis, the following alternatives have been identified. These alternatives
will address some of the current gaps in CRA's administrative policy.
The apportionment approach:
Theoretically, the portion of the EPECs that constitutes a personal benefit should be carved out
and be taxed as a fringe benefit, whilst the portion of the EPECs that generates benefits for the
employer should be received tax-free. This theoretical scheme would not be practical for obvious
reasons, especially with regards to administrative and compliance costs. However, in instances
where this apportionment can be done with relative ease and precision, the proposed law should
allow an option for such arithmetic apportionment. On the other hand, it is presumed that the
majority of the cases would involve EPECs that serve both a personal benefit and a benefit to the
employer indifferently. In these latter cases, it would be appropriate to apportion the benefit

52
The ICAA merged with the New Zealand Institute of Chartered Accountants to form the Chartered Accountants Australia and New Zealand in
December 2014.
53
Yasser El-Ansary, "Reforms to Deduction for Self-Education Expenses," The Institute of Chartered Accountants in Australia, (July 2013)
accessed on June 7, 2016,
www.charteredaccountants.com.au/~/media/Files/Industry%20topics/Tax/Exposures%20draft%20and%20submission/Treasury/20130718%20IC
AA_Submission_Reforms%20to%20deduction%20for%20self%20education%20expenses_July20131.ashx.
54
ATO, supra note 46 at 66.

- 13 -
equally between the two purposes (i.e., only 50% of the EPECs would be taxable in the hands of
the employee or a 50% 'inclusion' rate).
This method mirrors the deductibility of self-education expenses in Australia. The default 50-50
apportionment rule would provide administrative ease on the CRA's part. whilst a backdoor will
be left ajar for more precise apportionment in the case where the taxpayer can precisely carve out
the personal element of the benefit.
Imposition of a cap:
In reviewing the progression of events in the tax reform proposed by the Australian government,
a similar level of resistance may be met in Canada if the Canadian government pursues this
approach. A cap is essentially a patch fix in reducing the vertical equity problem illustrated
previously, and is not, in and of itself, a sound approach. Educational costs would likely vary
across geographic regions and industries. Imposing an arbitrary cap on EPECs would blatantly
ignore these nuances. Also, imposing a cap with respect to EPECs may drive employers and
employees away from this fringe to exploit other existing tax-free fringes.
The employer fringe benefit tax:
Another alternative would be to enact a tax on the employer for the provision of these fringes. If
an employer fringe benefit tax was to be enacted, there would be no perceived change from the
current tax treatment of EPECs from the employee's perspective. The strength of this approach is
that in the eyes of the employee, this will result in a more tax-effective outcome than a taxable
salary.55
However, the effective incidence, or the ultimate burden of the tax, may still reside with
the employees since the fringe benefit tax will increase the employers' costs and force employers
to reconsider the provision of these fringes. At this point, the extent of tax shifting, if any, arising
from this employer-based tax cannot be determined. Consequently, employers will raise the same
argument as presented in the Gezella saga and claim that the government's move would effectively
deter the employers' investments in their workforce. It is foreseeable that there will be an increase
in administrative and compliance costs since the Canadian corporate income tax system does not
currently deal with employees' fringe benefits through an employer-based tax. On the other hand,
the increase in administrative and compliance costs may be limited since the employer-based tax
can be administered through normal remittances that are done by the employers: the periodic
remittance of Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums
to the government.
Use of the tax credit system:
The last approach being contemplated would leverage off the existing tax credit system. Assume
that an employer reimburses the employee for undertaking coursework that leads to a degree,
diploma, or designation. In this case, the reimbursement would be treated as a fully-taxable fringe
benefit (i.e., a 100% inclusion into income), but the employee then becomes eligible for tuition tax
credits on the tuition amount. As such, although the reimbursement would be fully taxable in the

55
Robert J. McKay, "Australia," Canadian Handbook on Flexible Benefits, (June 2007): 474, accessed on July 1, 2016,
https://books.google.ca/books?id=0UqdJBy4wWcC&pg.

- 14 -
hands of the employee, relief would be granted in the manner of a tax credit under paragraph
118.5(1)(a) of the Act.56
This approach will enhance neutrality and equity. Neutrality would be improved because the 100%
inclusion into taxable income would apply to all taxpayers and close the line-drawing sub-issue
regarding new employees reimbursed for tuition fees by their employers. As such, there would be
presumably less behavioural distortions as a result of tax considerations. Vertical equity would be
improved in that the relief amount would not be a function of the taxpayer's marginal personal
income tax rate. This is important because the current tax system's relief for EPECs is 'amplified'
depending on the individual's marginal personal income tax rate. By administering the relief as a
credit, it will protect the progressivity of the tax system. Recall the illustrative example in
Appendix B. Assume now that the $5,000 in fringe benefit is taken into income. The incremental
impact on taxes payable would be a function of the respective taxpayer's marginal tax rate, net of
the tuition credit. The tuition credit would be identical to both taxpayers; thus the net impact would
result in the higher-income earner paying more tax. Consequently, vertical equity and progressivity
of this tax would be restored to some degree. The tax system is currently well-poised to adopt this
approach from an administrative standpoint since the tuition tax credit is a well-established
mechanism.
In this paper, the topic of salary sacrifice arrangements has been discussed briefly. The current tax
treatment of salary sacrifice arrangements in relation to EPECs is adequate. In instances where the
employee and the employer have entered into an arrangement under which the remuneration
ordinarily paid to the employee is reduced in recognition of training costs incurred by the
employer, the CRA considers this to be evidence that the benefit was, in substance, salary and thus
taxable under subsection 5(1).57
This is important to prevent employees from unduly taking
advantage of salary sacrifice arrangements as a way to avoid income inclusion. CRA's 'substance
over form' argument on this matter is reasonable: the salary packaged education expenses are, in
substance, salary, and thus, should be taxable. As a result, the adoption of the tax credit system
approach will also need to be coupled with CRA's existing treatment of salary sacrifice
arrangements in relation to EPECs.
ALTERNATIVE VEHICLE WHERE THE EMPLOYER SUPPORTS THE EMPLOYEE
Scenario: Use of a forgivable loan: Suppose an employer loans the employee $30,000 to pay the
tuition, and then forgives the loan over time at say $10,000 per year the employee continues to
work for that employer.
I have dissected the scenario into the following sequence of events:
The first event is the provision of the loan. Per subsections 6(9) and 80.1(1) of the ITA,
employment income includes a deemed interest benefit on an interest-free or low-interest loan
made by an employer and received by an employee in his or her capacity as an employee. As long

56
At the time of writing, the new Canadian federal government announced in its 2016 Budget that it will eliminate the education and textbook tax
credits for the 2017 and subsequent taxation years, however the measure did not propose to eliminate the tuition tax credit. The tuition tax credit
provides a 15% non-refundable tax credit on eligible fees for tuition and eligible examination fees paid to certain educational institutions.
57
See supra note 29 for a summary of a technical interpretation on this matter.

- 15 -
as the prescribed rate of interest is charged on the loan, and the employee pays the interest owing
by January 30 of the following year, there would not be a deemed interest benefit.
The second event is the forgiveness of the loan. Per subsections 6(15) and 6(15.1) of the ITA, the
forgiven amount is to be included in employment income of the employee. Since the employer
forgives the loan at a rate of $10,000 per year, the employee will have an income inclusion of
$10,000 per year for three years.
The third event involves the interplay with the tax credit system approach. Since there will be an
income inclusion of the forgiven amount under the existing law, the tax credit system approach
would fit smoothly in this scenario. Given that the employer and employee can demonstrate that
this arrangement was, in substance, employer-paid educational costs, the tax credit system
approach will entitle the employee to a tuition tax credit under paragraph 118.5(1)(a). It is,
therefore, important to treat the forgivable loan and the EPECs separately. There will be a timing
difference since the tuition tax credit will be granted as the employee pays for the tuition using the
loaned money, while the income inclusion will occur later as the loan is forgiven.
DIFFICULTY IN THE DEFINITION
There are inherent difficulties in defining courses leading to a degree, diploma or designation. The
scope of the proposed measure should not be so narrow as to ignore other types of courses where
the employee enjoys his or her own kind of benefit from the employer-paid education. In light of
this difficulty, the criteria set forth within paragraph 118.5(1)(a) for the purpose of claiming the
tuition tax credit appear to be a satisfactory starting point for this discussion.
Paragraph 2.5 of Income Tax Folio S1-F2-C2 Tuition Tax Credit clarifies that there is not an
exhaustive list of universities, colleges or other educational institutions in Canada providing
courses at a post-secondary school level. There are some assumptions and interpretations that are
normally applied in determining eligibility of an institution for purposes of subparagraph
118.5(1)(a)(i).58
Paragraph 2.8 of S1-F2-C2 further clarifies that for a course to be considered to
be at the post-secondary school level the course should provide credit towards a degree, diploma
or certificate, and a prerequisite for taking the course should be completion of secondary school.
In any case, it is the status of the course and not the status of the individual that is relevant.
An administratively simple solution would be to tax EPECs received by employees for post-
secondary school level courses that were taken at an educational institution defined under
subparagraph 118.5(1)(a)(i) and folio S1-F2-C2. Under the tax credit system approach, relief
would be granted in the manner of the tuition tax credit. In this way, the definition issue will be
principally resolved.

58
Unless there is specific information to the contrary, an educational institution is generally accepted to be a university or college if the applicable
province or territory in which the institution is located considers it to be a university or college, as long as courses are given at a post-secondary
school level. An "other educational institution" may include a professional organization that provides educational courses at a post-secondary school
level to members, as long as one minimum qualification for membership is secondary school graduation. Generally, a professional organization is
one that is empowered, under federal or provincial legislation, to make regulations governing certification and licences to practice the profession,
examination of candidates for membership and the right to practice, and the institution of a professional code of conduct for its members. See
Income Tax Folio S1-F2-C2 Tuition Tax Credit for more details.

- 16 -
Consider the following example: assume that the employee could take courses on a non-degree
basis, and then the employee later enrols in a degree program and requests the previously-taken
courses be transferred to become credits for the degree program. This example can be broken down
into two phases: the pre-transfer of the courses, and the post-transfer of the courses. Courses taken
in the post-transfer phase would undoubtedly be taxed as EPECs since courses taken thereafter
would reasonably move the employee towards completing the degree. The issue here resides in the
pre-transfer phase. During the time when the employee was taking courses on a non-degree basis,
it is essential to establish whether or not the employee was in receipt of an identifiable personal
benefit. This example illustrates a potential scenario where the personal benefit may not be
identifiable until a later date (i.e., the date of transfer of courses to become credits for a degree).
At the time when the employee was taking courses on a non-degree basis, there may not have been
any identifiable personal benefits. It is only with the trigger event (i.e., the enrolment and the
transfer of courses) that the personal benefits became identifiable. In these cases, it may be
necessary to delay income inclusion until a later time when identifiability has been reasonably
established. One may consider to this to be a weakness of the proposed measure given the delay
in income inclusion. However, the prestige and external recognition of a post-secondary academic
credential may be sufficient to limit this type of exploitation. Whether the individual qualifies for
the tuition tax credit would depend on the status of the course (see second paragraph of this
section).
To qualify the above discussion, if the employee took courses at a college towards a diploma (i.e.,
still on a non-degree basis), and if the employee later enrols in a degree program and requests the
college courses be transferred to become credits for the degree, there would be no such issue.
Courses taken towards a college diploma would be caught within the scope of the proposed
measure, and courses taken after the transfer towards a university degree would also be caught
within the scope of the proposed measure. As such, the identifiability issue is only of concern in
cases where the courses are outside the explicit reach of the proposed measure. If it can be shown
that these courses, being outside the explicit reach of the proposed measure, can provide
identifiable personal benefits to the employee, it should still be subjected to taxation.
A BRIEF NOTE ON LINE-DRAWING
Although this paper has focused squarely on EPECs that would lead the employee to qualify for a
degree, diploma, or a designation, its scope could be expanded to include employer-paid
educational programs where the employee derives an identifiable personal benefit. This is to avoid
potential efficiency costs arising from an ill-drawn line where economically similar taxpayers are
treated dissimilarly.
For example, the Chartered Professional Accountants of Canada (CPA Canada) offers an "In-
Depth Tax Course," which is a three-year program providing tax practitioners with a
comprehensive, practical and relevant income tax training. The program costs a total of $15,280
plus applicable taxes.59
The question regarding its taxability would hinge on whether or not the
employee received an identifiable personal benefit. Since the wealth and depth of tax knowledge
have increased by way of the employee taking the program, the employee certainly received his or

59
CPA Canada, "In-depth tax course: Overview," In-Depth Tax Course Brochure, (June 2016), accessed on July 1, 2016,
https://www.cpacanada.ca/~/media/site/operational/ep-education-pld/docs/in-depth-tax-brochure-30608.pdf?la=en.

- 17 -
her own kind of personal benefit. The employee's technical skills undoubtedly improved as a result
of taking the course. Per the information brochure of the program, "students who successfully
complete the In-Depth Tax Course will receive a CPA Canada Certificate of Achievement in Tax
Education, which is a nationally recognized symbol of excellence in continuing education for tax
practitioners."60
This certificate becomes a personal asset of the employee.61
The University of Waterloo offers a two-year Master of Taxation (MTax) program that has a
comparable level of rigour to the In-Depth Tax Course. The MTax program costs a total of $35,484
plus incidental fees.62
The costs of both programs are not trivial – resulting in a personal benefit
to the employee if paid for by the employer. Taxing EPECs where the employee has chosen to take
the MTax program whilst not taxing the employer-paid In-Depth Tax Course, would be inefficient
and cause behavioural distortions. As such, whether employer-supported training should be taxed
is a question of fact. If it can be shown that these courses (e.g., the In-Depth Tax Course), being
outside the explicit reach of the proposed measure, can provide identifiable personal benefits to
the employee, it should still be subject to taxation.
The scope of this report should not be interpreted as a boundary to which EPECs should be taxed.
The discussions herein are applicable to other employer-supported training such as the In-Depth
Tax Course. In sum, the spirit of this paper is that if it can be shown that the employee derives his
or her own kind of economic benefit from the employer-paid education, it should be fully taxable.
I have restricted the scope of this paper to EPECs that would lead the employee to qualify for a
degree, diploma, or a designation to illustrate an extreme on the spectrum of employer-supported
training.
CONCLUSIONS, RECOMMENDATIONS, AND NEXT STEPS
In this paper, the merits and drawbacks of the current treatment of EPECs in Canada were
discussed. An argument on the grounds of international competitiveness could be made in support
of the existing treatment, but it has been shown that this policy is incongruent with many other tax
policy goals such as equity and neutrality. There also appears to be a line-drawing sub-issue arising
from the taxability of employer-reimbursed tuition fees for new employees. Taken as a whole, the
current treatment of EPECs is inadequate. The tax treatments of EPECs in the US, the UK, and
Australia were then surveyed to better understand the various approaches that are currently being
adopted in dealing with this dual-purpose benefit issue. Notably, the cap approach was met with
great resistance in Australia to such a degree that the new government immediately repealed the
decision. Four approaches were then examined: (a) the apportionment approach inspired from an
Australian tax ruling, (b) the cap approach, (c) the employer fringe benefit tax, and (d) the tax
credit system approach.
There are strengths and weaknesses to each approach, but the tax credit system approach appears
to be well-poised for adoption. To a large extent, the tax credit system approach would improve

60
CPA Canada, supra note 59.
61
To further strengthen this argument, since CPA Canada is considered a professional organization that delivers post-secondary school level
courses, it is a certified educational institution under sections 118.5 and 118.6 of the Act. The Minister of Employment and Social Development
Canada certifies post-secondary institutions under the Income Tax Act. CPA Canada appears in the searches made under the Master Certification
List (MCL) tool. See supra note 58 for more details.
62
University of Waterloo, "Fee Schedule for Graduate Students Fall 2016," University of Waterloo Finance Department, accessed July 1, 2016,
https://uwaterloo.ca/finance/student-financial-services/tuition-fee-schedules/fee-schedule-graduate-students-fall-2016.

- 18 -
equity and neutrality. Overall, this approach will protect the personal income tax base that has
presumably been eroded since the change in CRA's administrative position in 1998.
It is expected that the public will raise the international competitiveness argument once again if
the tax credit system approach is adopted. In response, the government can subsidize education to
working Canadians through a formal loan and/or grant program. Simply allowing EPECs free rein
on the basis of international competitiveness is, in and of itself, a poor tax policy choice.

- 19 -
APPENDICES
(figures in Canadian dollars unless otherwise stated)
APPENDIX A: Analysis on Horizontal Equity Grounds
APPENDIX B: Analysis on Vertical Equity Grounds
Employee A Employee B
Under current situation: employer pays $5,000 for MBA course for Employee A*
Salary 70,000 75,000
Fringe benefit 5,000 - Note 1
Ability to pay 75,000 75,000
Taxable income 70,000 75,000 Note 1
Federal taxes
First bracket (15%) 6,792 6,792
Second bracket (20.5%) 5,067 6,092
Total federal taxes 11,859 12,884
Under ideal situation: employer pays $5,000 for MBA course for Employee A*
Salary 70,000 75,000
Fringe benefit 5,000 -
Ability to pay 75,000 75,000
Taxable income 75,000 75,000 Note 2
Federal taxes
First bracket (15%) 6,792 6,792
Second bracket (20.5%) 6,092 6,092
Total federal taxes 12,884 12,884 Note 2
*This example ignores Employment Insurance (EI), Canada Pension Plan (CPP), and tax credit considerations.
Note 1: Assuming that the MBA course is relevant to the work performed by Employee A, the employer-paid portion of the
course fee would be non-taxable based on CRA's current administrative policy. However, the ability to pay is the same, based
on Haig-Simons income. This policy is not horizontally equitable because their abilities to pay are the same, but the federal tax
burdens are different ($11,859 for Employee A, and $12,884 for Employer B).
Note 2: CRA's past administrative policy considered a degree to be a personal asset. As such, employer-sponsored tuition fees
to help the employee to enrol into coursework leading to a degree would be taxable as a result. This is based on CRA's
previous technical interpretations discussed in the paper. CRA's previous administrative policy is more horizontally equitable.
Employer pays $5,000 each for the MBA course for Employees C and D:
Employee C Employee D
Salary 70,000 250,000 p
Fringe benefit 5,000 5,000 q
Ability to pay 75,000 255,000 r = p + q
Taxable income 70,000 250,000 p
Difference 5,000 5,000 s = r - p
Marginal federal personal tax rate 20.5% 33.0% t
Federal tax savings 1,025 1,650 u = s * t
Marginal provincial personal tax rate (assumed) 12% 17% v
Provincial tax savings 600 850 w = s * v
Total tax savings 1,625 2,500 x = u + w

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