13 July 2005 External T.I. 2005-0115261E5 - Withholding Tax and Information Returns

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: Whether withholding tax and information returns are required in respect of employment, scholarships, bursaries, fellowships and research grants paid to residents and non-residents students of Canada.

Position: Withholding tax and T4 information returns are required for payments in respect of salaries and wages paid to residents and non-residents of Canada.

Withholding tax is not required in respect of scholarships, bursaries, fellowships or research grants. A T4A information return is required to be filed by the payer in respect of such payments to residents and non-residents of Canada

Reasons: The withholding tax requirements under subsection 105(1) of the Regulations for payments made to non-residents does not apply to remuneration paid in respect of salary or wages. Withholding tax is required in respect of salaries or wages pursuant to the rules outlined in subsection 153(1) of the Act for both residents and non-residents of Canada and T4 information returns are required to be filed pursuant to Regulation 200(1).

Withholding tax is not required for amounts that are included in calculating a resident's income under either of paragraphs 56(1)(n) or (o), or, would have been required by paragraph 56(1)(n) or (o) to be included in computing the non-resident person's income for the year if the non-resident person were resident in Canada throughout the year.

XXXXXXXXXX 2005-011526
Rob Ferrari
(613) 957-2138
July 13, 2005

XXXXXXXXXX:

Re: Withholding Tax and Information Return Requirements in respect of Scholarships, Fellowships, Bursaries, Research Grants, Salary and Wages

This is reply to your letter of May 28, 2004, in respect of the above noted matter. We apologize for the delay in our reply.

XXXXXXXXXX. Your letter describes the XXXXXXXXXX as a training ground for post doctoral fellows, graduate students, undergraduate students and summer students. The students and trainees are paid amounts that may be categorized as scholarships, bursaries, fellowships, research grants or employment income. Post doctoral fellows are provided with the option of having their fellowship income as research grants. The awards, salaries and wages are made to both residents and non-residents of Canada.

You have asked whether withholding taxes are required at source and the type of information returns that are required to be filed in respect of the various payments made to the resident and non-resident students and trainees.

Characterization of Amounts Paid

Your letter indicates that post doctoral fellows are provided with the "option" of having their fellowship income as research grants. Interpretation Bulletin IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants, provides a detailed discussion with respect to determining the nature of such payments, which is available on our website at www.cra-arc.gc.ca.

It is the primary purpose of the award that determines whether it represents a scholarship, bursary, fellowship, research grant or an amount on account of employment. If the primary purpose of the award is to further the education and training of the recipient, the award may be considered a scholarship, bursary or fellowship. The taxable amounts of scholarships, bursaries and fellowships received in the year are generally included in a resident's income under paragraph 56(1)(n) of the Act. If the primary purpose of the award is to carry out research, the award may be considered as a research grant and would generally be included in a resident's income (net of allowable expense) under paragraph 56(1)(o). Scholarships, bursaries, fellowships and research grants may be included in the calculation of a non-resident's taxable income by virtue of paragraph 115(1)(a)(v) and subparagraph 115(2)(e)(ii) of the Act. In cases where it is difficult to determine the primary purpose of the award, the characterization may be left to the grantor. Such a determination must be reasonable in the circumstances and should be based on the guidelines set out in IT-75R4.

In certain circumstances, awards may also represent or contain an element of remuneration for the performance of the duties of employment, which would then be included in a resident student or trainee's income under subsection 5(1) of the Act, or may be included in a non-resident's income pursuant to paragraph 115(1)(a)(i) of the Act. In determining whether activities represent services rendered in respect of employment, generally, such services are requested by the employer and are provided by the employee in return for remuneration, and a master servant relationship develops. For further information on this issue, we would refer to you to paragraphs 14, 15 and 30 of IT-75R4 and paragraphs 65 to 67 of Information Circular IC 75-6R2, Required Withholding From Amounts Paid to Non-Residents Providing Services in Canada.

Withholding Tax and Information Returns

Salary and Wages

Subsection 105(1) of the Income Tax Regulations (the "Regulations") requires every person paying to a non-resident person a fee, commission or other amount in respect of services rendered in Canada, of any nature whatever, to deduct or withhold 15 per cent of such payment. There are certain exceptions to the 15% withholding rate prescribed by subsection 105(1) of the Regulations, which includes remuneration paid in respect of salary or wages, as defined in subsection 100(1) of the Regulations.

Under paragraph 153(1)(a) of the Act and section 102 of the Regulations, every person paying salary, wages or other remuneration for services is required to deduct or withhold from the payment the amount determined in accordance with the prescribed rules. Information Circular IC 75-6R2 states "...remuneration paid to non-resident employees who provide services in Canada is subject to the same withholding, remitting, and reporting obligations as those for Canadian resident employees." IC 75-6R2 also indicates that employers are required to withhold and remit, Canada Pension Plan contributions (CPP), and Employment Insurance Premiums (EI) for each of their employees unless a waiver of withholding tax has been issued and/or an exemption provided for CPP based on a Reciprocal Agreement on Social Security that Canada has with the employee's home country.

Pursuant to subsection 200(1) of the Regulations, an information return (T4 summary of Remuneration Paid and T4 Statement of Remuneration paid) is required to be filed by every person who makes a payment described in subsection 153(1) of the Act.

Scholarships, bursaries, fellowships and research grants

In reference to residents of Canada, IT-75R4 states "Tax does not have to be withheld at source from amounts that are included in calculating the recipient's income under either of paragraphs 56(1)(n) or (o)." Similarly, where amounts that would be required by paragraph 56(1)(n) or (o) to be included in computing the non-resident person's income for the year if the non-resident person were resident in Canada throughout the year and the reference in the applicable paragraph to "received by the taxpayer in the year" were read as a reference to "received by the taxpayer in the year from a source in Canada", tax would not be required to be withheld at source on such amounts paid to non-residents students and trainees.

Pursuant to subsection 200(2) of the Regulations, every payer of a research grant, scholarship, fellowship, bursary or prize (other than a prescribed prize) must file an information return (T4A Summary of Pension, Retirement, Annuity and Other Income and T4A Statement of Pension, Retirement, Annuity and Other Income). The CRA's administrative position is that a payer is only required to issue a T4A slip when reportable payments total $500 or more, or if income tax was deducted from the payment.

We hope the above comments are of assistance.

Yours truly,

Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch