Court finds tuition discounts for teacher-parents to be taxed at market value
Teachers in the private school system often enjoy the perk of being able to send their kids to the school they teach at with the help of a considerable discount on the tuition amounts normally paid by other parents. This usually involves getting to send a child to their school for half the amount other parents shell out, or in some cases being able to do it for free. Schools, as employers, do this for a number of reasons, including:
- Like any other employee perk, it incentivizes good job performance and attracts stronger teacher candidates.
- It shows other parents that teachers think highly enough of the school to send their own children there.
- It encourages teachers to feel more invested in the organization they work for, and without the discount they likely wouldn’t be able to enroll their children.
Other parents at the school often agree with the policy on the basis that teachers “don’t get paid enough anyways”. The problem is that when tax season comes, this perk isn’t a pure windfall for the teachers – like any perk that isn’t strictly necessary for job performance it will be taxable in the hands of the teacher, as if the value of the perk was added on to the teacher’s salary. Here is a link to the Canada Revenue Agency’s guide on taxable benefits. The basic idea is that anything an employer gives an employee because of their employment that is for a personal rather than profession purpose is generally going to be treated as if it was a bump in their salary (and hence they have to pay more tax than they would otherwise have to). For example, when an employer pays for an employee’s buspass, the amount the employer pays will be treated as if it was part of the employee’s salary. Paying for an employee to fly to Las Vegas and stay in a comfy hotel for the purpose of representing the company at a conference – generally not a taxable benefit.
The challenging part of the analysis for the courts isn’t whether some expense paid by an employer is a taxable benefit but how much that benefit was worth to the employee (and how much income tax they should have to pay on it).
When it comes to teachers, how do you put a value on a tuition discount?
The Federal Court of Appeal ruled last week (CanLII) that private school teachers who receive tuition discounts for their children’s enrollment have to pay tax on the full value of the discount. Jamie Golombek summarized the decision well in this article in the Financial Post. In a nutshell, he writes: “the value of the free tuition was the difference between the normal tuition fee less the amounts actually paid.”
The debate on this issue involves two different positions on the method of valuation. The first position, which was argued by the teachers in this case, is that the value of the taxable benefit should be the amount the benefit costs to the employer. In other words, suppose a private school charges $10,000 per student in tuition. If the cost of educating a teacher’s son costs the school an extra $6,000 and the teacher, with a tuition discount, pays $5,000, then the teacher should only be taxed on the balance ($1,000) and not on the amount they saved had they not been a teacher.
The other position in the debate, and the one accepted by the court, is that they teacher should be taxed on the whole $5,000, and the cost to the school is irrelevant. Here is how it is explained by tax professor Kim Brooks, who was cited in the decision:
Employers can often provide some goods or services to employees at very little cost to themselves. It is sometimes argued as a result that because these benefits are provided at no substantial cost to employers, they should not be taxed in the hands of employees. However, the obvious reason for discarding this test is that it is the employee’s income that is in issue. The employer’s cost of providing these goods is irrelevant to this issue.
The “cost to the employer” method assumes that the value of the benefit to the employee will equal the cost of the benefit to the employer. Both of these empirical assumptions are wrong. Employees may receive a huge personal benefit from employer-provided goods and services even though they cannot sell the goods and services, and there is no reason for supposing that the value of a benefit to an employee should be in any way related to its cost to the employer.
The court’s ruling overturned the earlier decision (CanLII) of the Tax Court of Canada, which disagreed with Professor Brooks in this context.
Since these tuition discounts can mean a big benefit for teachers, it is important that teachers understand the tax implications of accepting this perk. If they can’t otherwise afford to pay the regular tuition amount, they may possibly have trouble paying the tax on the perk, in which case it may be necessary for them to decline altogether. Their employers, too, should have a sense of how courts treat these discounts and, without giving their employees any tax advice, schools may want to alert teachers to this issue.