8 February 2012 External T.I. 2010-0376491E5 - Repayment of Medical School Education Assistance

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Would the CRA consider a repayment to constitute an amount paid out by a corporation to earn income from its business and therefore, be deductible by the corporation?
2. In the event CRA considers that the repayments are not deductible by the corporation,
(a). Would they be deductible by the individual?
(b). Would qualifying tuition amounts repaid be eligible for the tuition tax credit?
(c). If yes, would it be eligible for the tuition tax credit for the year in which the amount is repaid, or alternatively, for the year in which the original tuition costs arose?

Position: 1. No.
2(a). Yes to the extent that the repayments are made by the individual, the amounts were previously included in computing the individual's income from an office or employment, and the total of repayments does not exceed the total of amounts received by the individual.
2(b). Yes, providing the tuition fees meet the requirements provided under subparagraphs 118.5(1)(a)(i) or 118.5(1)(a)(ii) of the Act.
2(c). The year in which the original tuition costs arose.

Reasons: 1. The repayment is considered a personal expense of the shareholder rather than a business expense of the corporation.
2(a). Pursuant to paragraph 8(1)(n) of the Act.
2(b). The student/employee has in effect paid the tuition fees.
2(c). Section 118.5 of the ITA provides credits for tuition fees paid "in respect of the year" in which the student enrolled in an educational institution.

XXXXXXXXXX
				2010-037649
				A. Mahendran
February 8, 2012

Dear XXXXXXXXXX :

Re: Deductibility of Repayment of Medical School Education Assistance

We are writing in response to your correspondence dated July 29, 2010, wherein you asked for our interpretation on the deductibility of repayment of education assistance in the circumstances described in your letter.

Based on the limited information provided, we understand that a physician received funding for his medical school education and training while he was employed in a capacity related to his educational program. The funding agreement required the physician to practice medicine in a particular jurisdiction following the completion of the educational program. However, the corporation that the physician created determined more income could be earned by opening a medical practice in a different jurisdiction. As a result, the physician was required to repay the amounts covered by the funding agreement, including qualifying tuition amounts, clinical teaching costs, other related training costs, administrative fees, gross earnings received in the employment related to the educational program, benefits arising from the above employment earnings, and interest on the above amounts.

Your Questions:

In particular, you would like to know if the repayment would be considered as an amount paid out by the corporation to earn income from its business and therefore, be deductible by the corporation.

You would also like to know if the amounts repaid are not deductible by the corporation, would they be deductible by the individual. It is your understanding that the qualifying tuition amounts repaid would be eligible for the tuition tax credit and the taxable employment income amounts repaid would be deductible by the individual.

Our Comments:

The determination of the income tax treatment of payments, such as those described in your letter, can only be made after reviewing all of the relevant documentation related to the particular funding agreement. However, based on the limited information available to us, we are prepared to offer the following general comments, which may be of assistance.

1. Are the repayments deductible by the corporation?

The determination of whether an amount paid out by a corporation is deductible for income tax purposes is a question of law. A taxpayer's income for a taxation year from a business or property is determined under subsection 9(1) of the Income Tax Act (the Act). Subsection 9(1) of the Act provides that, subject to the provisions of Part 1 of the Act, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit therefrom for the year. Also, paragraph 18(1)(a) of the Act, which is one of the general limitation provisions in Part 1 of the Act, provides that in computing the income of a taxpayer from a business or property, no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. By stating that "no deduction shall be made ... except to the extent that", paragraph 18(1)(a) of the Act in conjunction with subsection 9(1) of the Act effectively prohibits the deduction of an expense not incurred for the purpose of earning business or property income. This means that if expenses are not incurred for the purpose of earning business or property income, then they are not deductible in computing profit under section 9 of the Act.

In the case at hand, the physician entered into a funding contract with an organization prior to the creation of the corporation and received the funding for his medical school education as an employee of the organization. According to the funding contract, if the physician is not willing to practice his profession in the particular jurisdiction following the completion of his educational program, the need for repayment will be unavoidable even in the absence of the corporation's business activity, and therefore, the repayment would likely be viewed as a personal expense of the physician rather than a business expense of the corporation. Paragraph 18(1)(h) of the Act provides that no deductions shall be made for personal and living expenses of a taxpayer except travelling expenses incurred by the taxpayer while away from home in the course of carrying on his or her business and therefore, the repayments are not deductible by the corporation.

2. If the repayments are not deductible by the corporation, would they be deductible by the individual?

Interpretation Bulletin IT-340R2, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants - Forgivable Loans, Repayable Awards and Repayable Employment Income, addresses repayments of employment income and its income tax consequences including the deductibility of repayments. Particularly, paragraph 12 of the bulletin describes the circumstances in which a repayment of employment income is deductible under paragraph 8(1)(n) of the Act.

Pursuant to paragraph 8(1)(n) of the Act, a taxpayer is entitled to have a deduction for amounts that the taxpayer reimburses to his or her employer or former employer if the following conditions are met:

i) the reimbursements are pursuant to an arrangement under which the taxpayer is required to reimburse any amount paid to the taxpayer for a period throughout which the taxpayer did not perform the duties of office or employment;
ii) the amounts were previously included in computing the taxpayer's income from an office or employment; and
iii) the total of reimbursements does not exceed the total of amounts received by the taxpayer for the period throughout which the taxpayer did not perform the duties of the office or employment.

In the case at hand, pursuant to the agreement, the former employer extended a financial support to the individual to complete his medical school education and training. According to the agreement, if the individual is unable or unwilling to fulfill his return of service obligations, he would be required to pay back the amounts covered by the funding agreement. Therefore, it is our view that paragraph 8(1)(n) of the Act would apply to the repayments made by the individual to the former employer, if the second and third conditions indicated above are met.

3. Would qualifying tuition amounts repaid be eligible for the tuition tax credit?

Subparagraph 118.5(1)(a)(iii) of the Act provides that a tuition tax credit may be deducted from tax except to the extent that the tuition fees are paid on the individual's behalf by the individual's employer and are not included in computing the individual's income. In other words, where an employer pays or reimburses an employee for tuition fees and the amount is not included in income, subparagraph 118.5(1)(a)(iii) denies a claim for the tuition tax credit. However, where an employee's tuition fees are paid by his employer and are subsequently repaid by the employee, the CRA is of the view that if the program in question satisfied the requirements of subparagraphs 118.5(1)(a)(i) or 118.5(1)(a)(ii) of the Act, the employee is entitled to claim the tuition tax credit under section 118.5 of the Act because the employee has in effect paid the tuition fees.

You have also asked whether the qualifying tuition amounts repaid would be eligible for the tuition tax credit for the year in which the amount was repaid, or alternatively for the year in which the original tuition costs arose. Section 118.5 of the ITA provides credits for tuition fees paid "in respect of the year". Specifically, paragraph 118.5(1)(a) provides that an individual may claim a tax credit for a taxation year if the individual is enrolled as a student in that taxation year, and pays tuition fees in excess of $100 to either: (a) an educational institution in Canada for courses at the post-secondary level; or (b) an institution certified by the Minister of Human Resources. Pursuant to paragraph 118.5(1)(a), the individual must have been a student enrolled in an educational institution during the taxation year in which the credit is claimed. Therefore, qualifying tuition amounts repaid may only be eligible for the tuition tax credit for the year in which the original tuition costs arose.

While we trust that these comments will be of assistance, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Sharmini Ratnasingham
Assistant Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch