11 June 2007 External T.I. 2007-0225741E5 - MB Medical Student/Resident Financial Assistance

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: How should financial assistance paid by the Manitoba Government to medical students residents be taxed?

Position: Taxed as employment or business income.

Reasons: Since the amounts paid to students are likely forgivable loans and would be forgiven when the students are employees of the Province or self-employed, they would be taxed as income from employment under paragraph 6(1)(a) and subsection 6(15) or as self-employment income under paragraph 12(1)(x). Amounts paid to medical doctors are paid upon the completion of one year of service, and thus would be received by the individuals in their capacity as employees or self-employed physicians.

XXXXXXXXXX 							2007-022574
J. Gibbons, CGA
June 11, 2007

Dear XXXXXXXXXX:

Re: Manitoba Medical Student/Resident Financial Assistance Program (the "Program")

We are responding to your email dated February 27, 2007, concerning the income tax treatment of amounts ("Financial Assistance") paid under the Program. In particular, you wish to have our views about how Financial Assistance should be reported for income tax purposes.

Written confirmation of the tax implications inherent in particular proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (the "CRA").

The background is as follows:

Program Description

There are two components to the Program:

• the "Educational Assistance Option" or "EAO", which assists medical undergraduates and medical residents during their medical training; and
• the enhanced "Practice Assistance Option" or "PAO", which assists physicians who have established a family medicine practice in Manitoba.

Applicants are eligible to participate in both options to the extent that they have not received the maximum of four grants in total under both Program options.

Educational Assistance Option

"EAO Applicants" are:

• Third and fourth year medical students studying at the University of Manitoba, Faculty of Medicine
• Manitoba students attending third and fourth year medical studies in French at the University of Ottawa
• Medical residents at the University of Manitoba enrolled in a postgraduate program approved by the College of Family Physicians of Canada (the "CFPC"), the Royal College of Physicians and Surgeons of Canada, or the MSRFAP Review Committee
• Canadian medical graduates ("MDs") from the University of Manitoba Faculty of Medicine or the University of Ottawa who are in approved postgraduate medical programs at other Canadian and American universities

Before receiving Financial Assistance, EAO Applicants must enter into an agreement (the "Agreement") with the Province of Manitoba (the "Province") setting out the terms and conditions under which the Financial Assistance is to be paid. Under article 3.01 of the Agreement, the EAO Applicant is required to apply to the College of Physicians and Surgeons of Manitoba (the "College") and be registered to practice medicine in the Province within 90 days of, as the case may be:

i) the date on which the Applicant completes his or her "Family Residency Program",

ii) the date that the Applicant specified in his or her application as the "Expected Date" for completing the "Postgraduate Medical Training Program", or

iii) the date that the Applicant specified in his or her application as the "Expected Date of Completion of Sub-Specialty Training" or the date the "Review Committee" specified in writing on the Application as this date.

In lieu of returning to service, as described in the preceding paragraph, EAO Applicants have the option under article 3.02 of the Agreement to repay the entire amount of the Financial Assistance plus the amount of interest accrued thereon as the date of repayment. Further, article 3.03 of the Agreement also provides that if the EAO Applicant is unable for any reason to complete his or her degree or, after the completion of the degree, to enter and complete any "Family Medicine Residency Program", "Postgraduate Medical Training Program" or "Recognized Subspecialty", which, in the opinion of the Province is consistent with the intent of the Agreement or the MSRFAP, or both, the EAO Applicant must repay the Financial Assistance and the interest accrued thereon from the date of payment.

Article 5.0 of the Agreement provides for interest on the outstanding Financial Assistance at an annual rate equal to the prime rate being charged to the Province by its principal banker.

Article 7.01 of the Agreement provides that the Province shall forgive the Financial Assistance on the basis of $1,666.67 for every full calendar month that the EAO Applicant is in continuous full-time practice as a physician in the Province provided that the EAO Applicant has practised as a physician for a minimum of 12 months in the Province. Further, this article provides that all interest that has accrued on the Financial Assistance shall not be payable if the EAO Applicant has satisfied the entire duration of his or her return of service requirement.

Financial Assistance and all interest accrued thereon is evidenced by a promissory note that is signed by the EAO Applicant before the payment of the Financial Assistance and is held by the Province until, in the Province's reasonable opinion, all of the applicant's obligations and undertakings under the agreement have been fully met.

Practice Assistanced Option

The "PAO Applicants" are MDs who have completed a CFPC approved postgraduate medical training program in Canada. Individuals who have received the maximum of four grants in total under both Program options may not apply. If a physician has received any EAO grant(s), the return of service for those grants must be completed prior to being eligible to apply for this grant.

Ten new grants will be made available annually to eligible family medicine physicians who have set up practice in the Province. Should there be more than five applicants for each rural and urban grant, grant money will be divided equally amongst eligible applicants, up to a maximum of $15,000 for each year of full-time work in urban Manitoba (defined as Winnipeg and Brandon) and $25,000 for each year of full-time work in rural Manitoba (everywhere else) to a maximum of one grant each year for four consecutive years. PAO Applicants must apply annually and are eligible under the enhanced PAO up to a maximum of four consecutive yearly grants in total under both programs. Thus, if an applicant has received four grants under the EAO, he or she will not qualify under the PAO.

Under the PAO, the physician must practice medicine in that community or area in the Province for one full year prior to Financial Assistance being granted.

Our opinion

EAO Applicants

It is your opinion that Financial Assistance paid to an EAO Applicant qualifies as a repayable award within the meaning of this term as set out in Interpretation Bulletin IT-340R, "Scholarships, Fellowships, Bursaries and Research Grants - Forgivable Loans, Repayable Awards and Repayable Employment Income". Paragraph 3 of this bulletin explains that, in order to determine whether an amount is a forgivable loan or a repayable award, the rights and obligations flowing from the agreement between the grantor and the recipient must be examined. It further indicates that if the agreement under which an amount is paid gives rise at the time of payment to an enforceable debt, it is the view of the CRA that the amount is a loan, but if the agreement specifies that the amount paid does not become a debt of the recipient unless the recipient fails to fulfil certain conditions, the amount is generally considered to be a repayable award.

The Agreement refers to Financial Assistance as an "advance", which, while not in and of itself conclusive, is one of various indications that the Financial Assistance is an enforceable debt. Other such indications include the facts that the Agreement provides for interest in Article 5.0, beginning on the date of payment and the Financial Assistance is secured by a promissory note which is signed by the EAO Applicant before any amount is paid by the Province. Further, the creation of the debt is not contingent on an EAO Applicant's failure to fulfill the "return to service" conditions in Article 7.01, but rather such conditions are the necessary prerequisites for the Province to forgive the debt. Accordingly, it is our view that the Financial Assistance most likely constitutes a forgivable loan.

As a forgivable loan, the Financial Assistance would not have to be included in the income of an EAO Applicant when paid by the Province. However, if the Financial Assistance and the accumulated interest thereon is later forgiven, the amount so forgiven would be taxed as employment income under paragraph 6(1)(a) and subsection 6(15) of the Income Tax Act (the "Act") or as business income under 12(1)(x) of the Act, depending on whether the recipient is an employee of the Province or self-employed. In the former case, the amount would be reported on a T4 slip.

In addition to the above income tax implications, an EAO Applicant qua employee may also be deemed to have received employment benefits under subsection 6(9) and section 80.4 of the Act for each year that the Financial Assistance is outstanding if the interest rate charged thereon is less than the rate prescribed in paragraph 4301(c) of the Income Tax Regulations. You may refer to Interpretation Bulletin IT-421R2, "Benefits to Individuals, Corporations and Shareholders from Loans or Debt", for more details on the interest benefit provisions in the Act. We note that any such interest benefits so assessed would reduce the amount of benefits that may be assessed later as a result of the forgiveness of interest.

PAO Applicants

In the case of Financial Assistance paid to a PAO Applicant, since an amount would only be paid to a qualified applicant on completion of one year of service, Financial Assistance would be received by an individual either in his or her capacity as an employee or self-employed professional. Thus, the amount would be taxed as employment income under paragraph 6(1)(a) and subsection 6(3) of the Act or as business income under 12(1)(x) of the Act, as the case may be. In the former case, the employer should report the amount on a T4 slip.

We trust that the above information is helpful.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch