13 July 2010 External T.I. 2009-0311901E5 - Post-Doctoral Fellows--Scholarship Exemption

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. Whether academic post-doctorate fellows can qualify for the full scholarship exemption. 2. Whether they can receive the exemption without having received a Form T2202A.

Position: 1. Unlikely. 2. No.

Reasons: 1. We do not view PDFs to be students. In our view, PDFs usually receive either employment income or research grants. 2. Form T2202A is required in order to receive the scholarship exemption.

XXXXXXXXXX
				2009-031190
				L. Merrigan
				(613) 957-8979
July 13, 2010

Dear XXXXXXXXXX :

Re: Income Tax Treatment of Post-Doctoral Fellows

This is in response to your correspondence dated July 13, 2008, in which you requested that your income received with respect to your position as a post-doctoral fellow ("PDF") be treated as fully exempt scholarship income for income tax purposes, although you have not received a Form T2202A, Tuition and Education Amounts Certificate, from the university where you work.

The situation outlined in your letter relates to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Although we cannot provide you with a definitive answer, we are prepared to provide the following general comments, which may be of assistance. If you wish to proceed with your request for a T1 adjustment after reviewing our comments, please submit all relevant facts and documentation to your local Tax Centre. A list of Tax Centres is available on the "Contact Us" page of the CRA website.

Our Comments

In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Income Tax Act (the "Act"). The 2010 federal budget proposed amendments to the Act that expressly preclude PDFs from claiming the scholarship exemption for tax years after 2009. Our comments below are applicable to tax years prior to 2010, and focus on the legislation as it was at the time that you wrote to us.

There are two broad requirements for an amount to qualify for the scholarship exemption found in subsection 56(3). First, the amount must be an amount that is properly included in income under paragraph 56(1)(n) - that is, it must be a "scholarship, fellowship or bursary". Second, the amount must be "received in connection with the taxpayer's enrolment in an educational program in respect of which an amount may be deducted under subsection 118.6(2)" - that is, the individual must qualify for an education tax credit that is connected to an educational program that is connected to the amount. If the individual does not qualify for the education tax credit, then the amount may be scholarship income but the individual's scholarship exemption will be limited to $500.

The nature of the income received by any individual must be determined on a case-by-case basis taking into account all of the relevant facts of the individual's situation. In the case of a PDF, it is our view that income received will most likely be considered to be employment income, research grants, scholarship income, or some combination of these types of income. In the past, the CRA has generally considered income received by PDFs to be either employment income or research grants for purposes of the Act. Historically, it is our understanding that many PDFs asked for amounts to be classified as research grants, rather than employment income or scholarship income, as research grants were allowed deductions for certain expenses (unlike employment income), while still qualifying as earned income for purposes of contributions to registered retirement savings plans (unlike scholarship income). Thus, for income tax purposes, there has never been a single, simple position with respect to income received by PDFs. In some cases, the income received by a PDF could be included in income under paragraph 56(1)(n); in most cases, we would expect either section 5 (for employment income) or paragraph 56(1)(o) (for research grants) to apply.

Assuming that paragraph 56(1)(n) does apply to an amount received by a PDF, several other issues must still be considered in order to determine whether the PDF is entitled to the full scholarship exemption provided by paragraph 56(3)(a), rather than being limited to the $500 exemption allowed by paragraph 56(3)(c):

1. Is the PDF entitled to the education tax credit under subsection 118.6(2) of the Act?

(i) Is the individual a student (subsection 118.6(2))?

(ii) Is the individual enrolled in a "qualifying educational program" at a "designated educational institution" (definitions in subsection 118.6(1))?

2. Is the amount paid to the PDF connected with the educational program for which the PDF may claim the education tax credit (subsection 56(3))?

Generally, the CRA does not consider PDFs to be "students" as that term is used in the Act. Rather, the CRA views PDFs to be the same as other individuals who are required to undertake a period of paid training after completing their studies prior to pursuing an independent professional career. In our view, PDFs are most similar to apprentices, articling students (for accounting and law), and medical residents. In each of these cases, the compensation paid to the individual is all or mostly taxable income.

The CRA has not considered question (1)(ii), above, in detail, given its view with respect to question (1)(i). However, turning to question (2), above, we note that, even if an individual was entitled to an education tax credit, to meet the final condition of the scholarship exemption, the scholarship must be connected to the educational program that gave rise to the tax credit. Thus, even if the CRA found that, under certain circumstances, a particular PDF was a student, and was enrolled in a "qualifying educational program" at a "designated educational institution", and was entitled to the education tax credit, it is not clear that an amount received by the PDF would be considered to be connected to his or her enrolment in the educational program. The extent to which an amount received by a PDF can be considered to be connected to an educational program, rather than to research (and other) services rendered to a university, laboratory, supervisor, or other paying entity, will depend on the particular situation. However, in our view, in many or most cases, the connection between the compensation received by a PDF (which has been referred to many times by universities, academics and post-doctoral fellows alike as "salary"), and an educational program, will be so slight as to be insufficient to warrant the application of the full scholarship exemption.

In summary, in our view, a PDF is more likely to receive employment income or research grants, for income tax purposes, than scholarship income. We are also of the view that the full scholarship exemption will not apply in most cases even where the income is scholarship income, because either the individual will not be entitled to the education tax credit, or the income received will not be sufficiently connected to an educational program for which an education tax credit is available. These views apply to taxation years up to and including 2009, and in particular to 2006 to 2009. We emphasize that the amendments announced in the 2010 federal budget with respect to PDFs and the scholarship exemption were clarifying in nature and did not indicate a change in either interpretation or tax policy. To the best of our knowledge, the full scholarship exemption was never intended to apply to PDFs. This was confirmed by the Honourable James Flaherty, Minister of Finance, to the House of Commons, on March 23, 2010:

"Mr. Speaker, there has been no change in the tax policy in Canada with respect to post-doctoral fellowships. It is exactly the tax policy that was followed by the Liberal government. ... Pure scholarships are not taxable in Canada. However as we know, post-doctoral fellows work."

In your correspondence, you refer to the CPP/EI Tax Court of Canada decision in Bekhor v. MNR, 2005 TCC 443. We note that the only issue before the court in Bekhor was whether the individual held pensionable, insurable employment for purposes of the Canada Pension Plan and the Employment Insurance Act. Consequently, any comments made by the court with respect to provisions of the Act do not form part of the ratio, or legal basis, for the decision. Whether or not a PDF may be a "student", with exempt scholarship income, for purposes of the Act, has not yet been directly addressed by Canadian courts.

You have commented that a PDF may be denied the benefits of both the CPP/EI legislation and the full scholarship exemption. However, based on the discussion in Bekhor, it appears that if a university enters into an express employment relationship with its PDFs, the PDFs will be eligible for CPP and EI benefits (and subject to appropriate withholdings), assuming other required criteria are met.

As a final note, subsection 118.6(2) expressly requires an individual to obtain a certificate in prescribed form from a designated educational institution, in order to claim the education tax credit. As you have not received such a certificate, you do not appear to qualify for the education tax credit; consequently, you would not qualify for the full scholarship exemption. In any event, for all of the reasons discussed above, where the tax return of a PDF is reviewed by the CRA, a claim for a full scholarship exemption will generally be denied, even if the PDF has obtained and filed a Form T2202A, Tuition and Education Amounts Certificate.

We trust that these comments will be of assistance.

Yours truly,

Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch