For dry high speed cutting the oxidation resistance of the protective hard coating of the cutting tool surface is very important. Therefore the effects of heat treatment on a TiAlN based hard coating deposited by the combined cathodic arc unbalanced magnetron sputtering technique have been studied using cross sectional transmission electron microscopy (XTEM) and energy dispersive X-ray analysis (EDX). The combination of these analytical techniques revealed the diffusion paths and preferences in diffusion of various coating and substrate elements in a physical vapour deposited (PVD) type coating after heat treatment. The structure comprises a ~2 µm thick TiAlCrYN coating on top of a 0.25 µm thick TiAlCrN base layer deposited on a stainless steel substrate. In the as-deposited sample Y was distributed in a fine layered structure (1.7 nm) throughout the coating. The coating was heat treated at temperatures between 600 °C and 900 °C in air for 10 hrs duration. With increasing temperature the microstructure changed gradually from interrupted columnar growth to a fully columnar structure at 900 °C as observed with XTEM. EDX analysis after heat treatment at 700 °C showed the presence of substrate elements Fe and Cr mainly at column boundaries in the base layer. In contrast no evidence of substrate elements could be observed in the TiAlCrYN coating, thus showing a sharp change in elemental composition concerning Cr and Fe between base layer and coating. This indicates that Y segregation in the TiAlCrYN coating along column boundaries inhibited column boundary diffusion of the substrate elements Cr and Fe. Energy dispersive X-ray distribution maps recorded after 800 °C annealing showed distinct segregation of Y along the column boundaries. The substrate elements, Fe and Cr, were observed through the coating along column boundaries up to 0.95 µm from the base layer/coating interface. After heat treatment at 900 °C the substrate elements had diffused from the substrate/coating interface to the coating surface. Y out-diffused, too and was concentrated adjacent to TiO2 crystals in the oxide layer.