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 Municipal Government in exchange for a requirement by a medical student to set-up a medical practice in the Municipality for a specified period of time be taxed?
Position: Question of fact but it appears that paragraph 56(1)(n) should apply.
Reasons: The law
XXXXXXXXXX 2008-027078
Michael Cooke
June 17, 2008
Dear XXXXXXXXXX :
Re: Medical Student Financial Assistance
This is in reply to your correspondence dated March 4, 2008 concerning the income tax treatment of certain payments by the XXXXXXXXXX (the "Municipality") to a medical student (the "Student").
Specifically, you indicate in your correspondence that the Student is enrolled in full-time studies at a local Canadian university and is currently employed as a resident intern at a local hospital as a requirement of the medical training program. The Student is not currently, nor will he in the future be considered to be an employee of the Municipality. The Student and the Municipality have entered into a written agreement (the "Agreement") pursuant to which the Municipality has agreed to pay the Student equal annual amounts (the "Payments") over a six-year period to cover the Student's tuition, books and living expenses while in medical school. Pursuant to the Agreement, the student must, within three months after completing his medical studies and becoming certified to practice medicine, commence the practice of family medicine within the Municipality for a five-year period. If for any reason the Student is unable to fulfil his obligations under the Agreement the Payments must be repaid with interest accruing from the date such repayment obligation arises.
You also indicate that the Payments commenced while the Student was still engaged in full-time medical studies, however, they may continue for a period of time after the Student has completed his studies and has commenced the practice of medicine.
You ask whether the Payments received by the Student from the Municipality pursuant to the Agreement would be included in the Student's income pursuant to paragraph 56(1)(n) of the Income Tax Act (the "Act"), subject to the exemption described in subsection 56(3) of the Act, or as amounts described in paragraph 12(1)(x) of the Act.
Our Comments:
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. It also remains a question of fact as to whether the payments made pursuant to any agreement would be amounts described in paragraph 56(1)(n) or paragraph 12(1)(x) or perhaps a forgivable loan. Notwithstanding the above, we are, however, prepared to offer the following comments.
Paragraph 56(1)(n) of the Act is a broadly worded provision that brings into income (subject to the "scholarship exemption" described below) amounts received in that year as a scholarship, fellowship, bursary or a prize for achievment in a field of endeavour (other than amounts described in paragraph (q) or amounts received in the course of business, and amounts received in respect of, or in the course of or by virtue of an office or employment).. As noted in paragraph 6 of Interpretation Bulletin IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants, normally a student is not required to do specific work for a payer in exchange for a scholarship or bursary. An amount received as a scholarship may be stated to be repayable if certain conditions attached to the particular award are not subsequently met. This feature does not alter the application of paragraph 56(1)(n) of the Act in the year the scholarship is received.
For the 2006 and subsequent taxation years, under subsection 56(3) of the Act, where a taxpayer receives an amount described in subparagraph 56(1)(n)(i) of the Act in connection with an educational program in respect of which the taxpayer is entitled to an education tax credit under subsection 118.6(2) of the Act for that taxation year, or the immediately preceding or following taxation year, the "scholarship exemption" would be equal to the entire amount so received. Accordingly, such a scholarship would not be included in the recipient's income.
Interpretation Bulletin IT-340R2, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants - ForgivableLoans, Repayable Awards and Repayable Employment Income, discusses the differences between a forgivable loan and a repayable award and the income tax consequences arising from such transactions. As stated in paragraph 3 of IT-340R, 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. If the agreement under which an amount is paid gives rise at the time of payment to an enforceable debt, it is our view that the amount is a loan. If the agreement specifies that the amount paid does not become a debt of the recipient unless the recipient fails to fulfill certain conditions, the amount is generally considered to be a repayable award. In such a case, where a student is required to repay a scholarship because of a failure to meet the conditions, paragraph 10 of IT-340R describes the circumstances in which a deduction from income may be available. In our view, the Agreement appears to create a repayable award as opposed to a forgivable loan.
You have also asked about the potential applicability of paragraph 12(1)(x) of the Act. This is another broadly worded provision, which provides that certain inducements, reimbursements, contributions, allowances, grants, or other financial assistance such as a forgivable loan received by a taxpayer in the course of earning income from a business or property will be included in the taxpayer's income in the year of receipt to the extent that the particular amounts have not otherwise been included in the taxpayer's income, or reduced the cost of an outlay or expense, or the cost of a property. As noted in paragraph 23 of Interpretation Bulletin IT-273R2, Government Assistance - General Comments, where a government organization provides a financial incentive to recruit health care professionals to practice in an underserviced area, such amounts would be included in income under paragraph 12(1)(x) of the Act provided none of the exceptions described in paragraph 8 of IT-273R2 apply.
In the situation you have described, it appears that the long-term objective of the Municipality is to entice the Student to set up a medical practice in the Municipality upon completion of his medical studies. However, the immediate purpose of the Payments is to provide financial assistance to enable the Student to pursue and complete his medical education and training. Based on our understanding that the Payments are only intended to cover the Student's tuition, books and living expenses while in medical school and are not intended to reduce any outlay or expenses in respect of the establishment of the student's medical practice following graduation, such amounts would, in these circumstances, be included in the Student's income pursuant to paragraph 56(1)(n) of the Act.
However, if the Payments were to continue for a significant period after the Student has graduated and is carrying on the business of his medical practice it would not be reasonable to accept that the Payments were only intended to cover the Student's tuition, books and living expenses while in medical school. In these circumstances, the Payments would be taxable under paragraph 12(1)(x) of the Act in accordance with the position outlined in paragraph 23 of IT-273R2.
We trust that our comments will be of assistance.
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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