Now that back-to-school season is here, some employees may be feeling the pinch as they pay tuition fees for their university or college-bound children. Companies can help these employees bear this cost by providing a tax-effective scholarship program for their children. And for a smaller business such programs can help attract and retain key employees. That is because the popular scholarships are taxed in the student’s hands, not the employee’s.
Until about three years ago, the Canada Revenue Agency (CRA) considered employer-paid scholarships for employees’ children to be a taxable benefit in the employees’ hands. The CRA changed its policy after a court decision that awards paid under a company’s post-secondary scholarship program should not be a taxable benefit to the employees.
Since the policy change, these programs have become more popular. For example, one private company recently took advantage of this change by expanding its existing scholarship program and providing this valuable benefit to more of its employees’ children.
Of course, it’s better from a tax point of view to have the scholarship taxed in the child’s hands rather than the employee’s because most post-secondary students have much less income than their parents, which means they pay tax at a lower rate, if at all.
Paul Woolford is a partner with KPMG Enterprise in Toronto.