Lifelong learning — education and training in all its forms — is vital to the health of Canada’s economy, the competitiveness of its companies and the prosperity of all Canadians.

Finance Minister Paul Martin said as much in this year’s budget. "The demand for knowledge and skills spans all occupations, at all levels, in all sectors — from factory to farm, from software to sales, from medicine to mechanics. Nor is this only about young people. It is also about the need to upgrade skills and develop new ones consistently throughout all of our working lives."

Revenue Canada, though, has become increasingly aggressive in interpreting its rules when it comes to education and training provided by employers. So far, its efforts seem to be aimed primarily at management training. That would be odd enough, given that Industry Canada has identified serious shortfalls in the country’s management skill base.

More worrying are the principles being established in Revenue Canada’s test cases. These could lead to retroactive tax bills for almost any Canadian gaining what it terms "broad or general" knowledge at the employer’s expense. Here’s why.

The general rule is bad enough. Interpretation Bulletin IT-470R uses the "principal purpose" test to determine whether training should be a taxable benefit. Generally, when an employer pays or reimburses an employee for tuition fees, the amount paid is to be added to the employee’s taxable income. An exception can be made under certain circumstances.

But in an assessment made last year and recently confirmed by the Minister of National Revenue, the tax department has staked out startling ground in two key areas. The case involves an employee of Regina-based IPSCO Inc. who was enrolled in an MBA course at the University of Pittsburgh, a program chosen by the company for its particular relevance to the steel industry.

In rejecting the company’s arguments, Revenue Canada said that a degree program would encompass a broad range of subject matter and therefore be of primary benefit to the employee rather than the company. Training required to meet the needs of the employer, it ruled, would have to be "defined, limited not broad or general".

This ruling completely ignores the reality that in today’s knowledge economy, almost all training involves broad and transferable skills. The clear implication is that almost any training received at a company’s expense could be declared a taxable benefit — retroactively and at the whim of a Revenue Canada auditor. The IPSCO employee received a tax bill in 1997 including interest and penalties dating to the 1993 tax year for a course he agreed to take in 1991.

The second dangerous facet of the IPSCO assessment is Revenue Canada’s ruling that not just tuition fees, but all costs incurred by the employer are taxable benefits. In the IPSCO case, this included the cost of travel to Pittsburgh and accommodation while there. The principle, though, could just as easily be applied to all of the billions of dollars companies spend on internal training programs providing "broad or general" knowledge and skills.

Right now, the situation is rife with inequities. Some companies do not and have never been told to issue T-4 slips for tuition paid or reimbursed. Others do, but according to varying standards. This uneven application has in turn raised the broader question of whether the policy itself makes sense.

The publicity surrounding the IPSCO case has sparked some serious soul-searching at Revenue Canada, and the department has begun a full-fledged review of the policy. As it does so, it should remember above all that companies invest in their employees because it is in their business interest to do so.

The Conference Board of Canada says expenditures on training have been growing in real terms since 1991. And major companies — the ones most engaged in the global information economy — are the country’s biggest investors in employee skills (see chart). A survey of members of the BCNI found average investment in training and human resource development of more than $1,800 annually per employee, or more than four percent of payroll. These are necessary investments in human capital, not bonus cheques to employees.

Of course an employee benefits too, because greater knowledge and skills represent opportunities for better jobs and higher pay. But if receiving knowledge and skills from an employer does lead to higher pay, the employee will pay more in income tax. To make people pay extra taxes for gaining knowledge is double taxation — and totally counterproductive in a knowledge-based economy.

As Mr. Martin noted in his budget speech, "There is no better way to reduce the gap between rich and poor, no surer way to widen the mainstream, no more meaningful way to reduce the numbers of those left behind, and no better way to provide a higher quality of life for Canadians, than to facilitate the path to greater education".

Helping Canadians to learn throughout their lives is both good public policy and good business strategy. Mr. Martin said correctly that all sectors of society share a responsibility to ensure that Canada builds on its strengths in an increasingly competitive global economy. The private sector is trying to do its part. To fulfil its responsibility, the government must stop punishing Canadians whose employers see the value of investing in their knowledge and skills.