29 October 2008 External T.I. 2008-0276691E5 - Post-graduate Educational Fellowships

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: Are amounts described as educational fellowships exempt from income tax under subsection 56(3) of the Act?

Position: Question of fact but in this case likely not.

Reasons: Amounts appear to be taxable as wages but we don't have all the facts.

XXXXXXXXXX 							2008-027669
								Michael Cooke
October 29, 2008

Dear XXXXXXXXXX

Re: Taxation of Post-Graduate Educational Fellowships

This is a response to your letter of April 24, 2008, concerning the taxation under the Income Tax Act (the "Act") of amounts that are paid (the "Payments") by the XXXXXXXXXX to individuals who have finished their basic medical and specialty residency training and are doing additional post-graduate clinical or research training in XXXXXXXXXX (the "Recipients").

Although the Payments have historically been reported as employment income, you ask whether the Payments could qualify for the exemption in subsection 56(3) of the Act for scholarships, fellowships and bursaries described in subparagraph 56(1)(n)(i) of the Act.

The situation outlined in your letter appears to relate to a factual one, involving a specific group of taxpayers. To obtain the Canada Revenue Agency's ("CRA") views on completed transactions involving specific taxpayers you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA's website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Comments

The tax treatment under the Act of any amount depends not upon the label affixed to the particular amount but upon its true nature. Accordingly, before deciding whether the Payments are eligible for the scholarship exemption, it must first be ascertained whether, for purposes of the Act, they are properly characterized as a scholarship, fellowship, or bursary or whether the Payments are something else. Generally speaking, amounts of this type could potentially be characterized as employment income, a research grant or a fellowship. The CRA would need to consider all relevant facts and information in order to determine this with any certainty. We are not in a position to provide a conclusive determination but can offer the following information.

Employment Income

Employment income is taxed as salary or wages under section 5 of the Act. Normally, when an employer-employee relationship exists, the employer expects work to be done, dictates how and when it should be done and remuneration is provided for such services.

While not an exhaustive list, in the context of the Payments, some of the factors that might indicate the existence of an employment relationship would be:

• the payer provides and pays for certain benefits such as health care, dental care or life insurance;
• the payer provides paid vacation leave and other work related paid leave;
• the payer assign tasks to be done, such as, rotations, on-call duties, teaching, resident coaching, etc.;
• the payer determines what research work will be done and how and when it will be conducted; and
• the worker provides assessments and recommendations regarding patient care and/or accomplishes the same or similar tasks as the payer's employees.

As noted above, if the amount is not taxable as salary or wages it might be included in income of the Recipient as a research grant under paragraph 56(1)(o) of the Act or as a fellowship under paragraph 56(1)(n) of the Act.

Research Grant

Distinguishing between a fellowship and a research grant is not always easy. The treatment will depend on the primary purpose for which the award amount was granted. This is determined according to the terms and conditions for granting the award. If the primary purpose of the award is to carry out research for its own sake (for example, to further knowledge in a particular field by discovering new facts, or by reinterpreting existing knowledge), the award is considered to be a research grant and would be included in the recipient's income under paragraph 56(1)(o) of the Act. We note that research grants need only be included in income to the extent that the grant exceeds allowable expenses incurred by the taxpayer in the year for the purpose of carrying on the work.

It may be that the recipient's education and training is also furthered by such research, but such a factor does not alter the primary purpose of the grant (i.e., its character does not change), provided the educational or training benefit could be considered to be a secondary purpose of the grant or an inevitable but incidental benefit.

Fellowship

Scholarship awards described in subparagraph 56(1)(n)(i) of the Act are a form of financial assistance that are intended to help students continue their studies for the purpose of obtaining a university degree, diploma or certificate. Fellowships are similar to scholarships in the sense that these sums are awarded to individuals to enable them to continue their studies. However, the recipient of a fellowship award is usually a graduate student and the payer is generally a university, a charity or a similar organization.

Whereas the primary purpose of a research grant is research, we would consider an award to be a fellowship if its main purpose is to further the personal education and training of the recipient. It is understood that research might be conducted in pursuing this goal, but unless research is the primary objective, this would not preclude the amount from being considered a scholarship or fellowship for purposes of subparagraph 56(1)(n)(i) of the Act. The main or primary purpose of an award is a question of fact to be determined by reference to all of the circumstances.

Scholarship Exemption

As of 2006, paragraph 56(3)(a) of the Act applies to fully exempt an amount that would otherwise be included in an individual's income under subparagraph 56(1)(n)(i) of the Act where the amount is received in connection with the individual's enrolment as a student in an educational program that is eligible for the education tax credit described in subsection 118.6(2) of the Act (the "ETC"). The ETC is available where an individual is enrolled as a student at a "designated educational institution," in a "qualifying educational program" or a "specified educational program," as those terms are defined in subsection 118.6(1) of the Act. These concepts are discussed in more detail in the CRA Guide P105, "Students and Income Tax." Generally, a post-graduate fellow is not considered to be a "student" for purposes of 118.6 of the Act.

If the institution offering the program satisfies itself that it meets the definition of a "designated educational institution" and that the individual is enrolled as a student in a program that meets the criteria for either a "qualifying educational program" or a "specified educational program" then the educational institution may issue a T2202 or T2202A form to the student. However, the receipt of such a form from an educational institution does not guarantee that an individual will qualify for the ETC. Eligibility for the ETC is determined on a case-by-case basis. An individual must satisfy all the conditions of subsection 118.6(2) in order to qualify. The CRA can only determine whether an individual has met these requirements after the individual's specific fact situation is reviewed.

Although we do not have all the necessary facts, it appears possible that the relationship in your fact situation may be one of employment such that the Payments would be taxable as salary or wages. If as a result of a review of all the facts the indicators point to the existence of both a professor-student relationship and an employment relationship, the CRA would likely consider that the Payments would be taxable as salary or wages because subparagraph 56(1)(n)(i) of the Act contains broad wording that would specifically exclude any amounts received in respect of, in the course of or by virtue of an office or employment. However, as noted above, the determination of all the outstanding issues in your particular situation would need to be considered by the relevant TSO. For information about requesting a determination as to whether an employment relationship exists, you may refer to the CPP/EI Rulings page of the CRA website at http://www.cra-arc.gc.ca/tx/hm/cppwrks-eng.html.

We trust our comments will be of assistance.

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