31 October 2012 External T.I. 2012-0432981E5 - repayable award and inducements

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) What is the proper income tax treatment for a repayment of sums received by an individual under Medical Services Agreement?

2) What is the proper income tax treatment for an amount that was paid to an individual pursuant to a Medical Services Agreement?

Position: 1) Depends on the facts. If no amount was included in computing the income of an individual in a preceding taxation year due to the fact that a full scholarship exemption was taken in each year that a scholarship amount was paid to the individual any repayments in respect of the award made by the individual would be non-deductible. 2) Depends on the facts. An amount received by an individual, in the year that was in the course of earning income from a business, from a government, where the amount can reasonably be considered to be received as an inducement is included computing income of the individual pursuant to 12(1)(x) of the Act.

Reasons: The legislation.

XXXXXXXXXX
2012-043298
N. Shea-Farrow

October 31, 2012

Dear XXXXXXXXXX:

Re: Amounts paid under a medical services agreement and repayments

This is in response to your e-mails of January 11 and 12, 2012 with respect to the proper tax treatment of amounts that are repaid by an individual (the "Individual") under a Medical Services Agreement (MSA1) and amounts that are paid to or on behalf of the Individual under another Medical Services Agreement (MSA2).

According to the information that you have provided pursuant to MSA1, dated XXXXXXXXXX, between the Individual and County A the Individual received annual scholarships from 2006 to 2010 inclusive, to cover the Individual's tuition, books and living expenses. The MSA1 stipulated that the funds provided were conditional on the Individual agreeing to practice family medicine in County A for a period of at least 5 years and other conditions. You state that the Individual was never an employee with County A before, during or after completion of his or her family practice residency. For taxation years 2006 to 2010 inclusive the Individual was engaged in full time studies in a Faculty of Medicine in Canada and paid tuition to the University and received a T2202A Tuition, Education and Textbook Amounts Certificate for each of the years.

On XXXXXXXXXX, the Individual, at the time a medical resident, and his or her Home Town entered into MSA2. The Home Town agreed to pay a scholarship to cover the costs of the Individual's tuition, books and living expenses. Home Town was in County B not County A. MSA2 had similar conditions to that of MSA1.

On XXXXXXXXXX the Individual, at the time a medical resident and County A signed a Release of Medical Services Agreement. The Individual agreed to pay County A an amount to release both parties from any further obligation under the MSA1.

Home Town paid the amount agreed to under MSA2 directly to the Individual's solicitor in trust. The Individual's solicitor paid County A directly the agreed to amount to release the Individual from MSA1 and the remaining balance of the funds were paid directly to the Individual. The Individual completed his or her residency on XXXXXXXXXX and shortly thereafter commenced and continues his or her practice of family medicine in Home Town as an unincorporated self-employed sole practitioner as a member of a Family Health Team and not as an employee of Home Town. The Individual is not paid on a fee-for-service basis but is paid under an alternative funding program by the Ontario Ministry of Health. The Individual expects to get a T2202A, from the University for calendar 2011 that will show approximately $XXXXXXXXXX in tuition fees and full-time attendance at the University for up to 6 months i.e. January 1 to June 30, 2011 (period of medical residency in 2011).The Individual expects a T4A, Statement of Pension, Retirement, Annuity and Other Income from Home Town with the amount paid out under MSA2 reported in box 26 as a scholarship.

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. However, we can offer the following general comments that may be of assistance.

MSA1 – Repayable amounts by Individual

The amounts paid under the MSA1 were reported according to you on a T4A for the Individual as "scholarship not taxable each year". Therefore, it is our understanding that no amount was included in computing the income on the Individual's return of income for each of the years that the scholarships were paid because the Individual qualified for a full scholarship exemption.

The MSA1 stated that if the Individual did not complete his/her studies, fails to complete the residency, fails to practice medicine in County A or fails to complete the 5 year term of service required in the MSA1, all amounts paid by County A to the Individual shall become due and payable together with interest from the date of demand at the rate of 15% per annum, calculated annually. This according to paragraph 3 of Interpretation Bulletin IT-340R would be a repayable award as the agreement specifies that the amount does not become a debt of the recipient unless the recipient fails to fulfill certain conditions.

According to paragraph 60(q) of the Act an individual that meets certain conditions is allowed to deduct repayment awards if the amount was paid to the individual for the purpose of enabling the individual to further the individual's education and if the award was included in computing the income of the individual in a preceding taxation year as an amount described in subparagraph 56(1)(n)(i) of the Act. Therefore if no amount was included in computing the income of an individual in a preceding taxation year due to the fact that a full scholarship exemption was taken in each year that a scholarship amount was paid to the individual any repayments in respect of the award made by the individual would be non-deductible.

MSA2 – Amounts paid under MSA2 to Individual

According to paragraph 6 of Interpretation Bulletin IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants, scholarships and bursaries are amounts paid or benefits given to students to enable them to pursue their education. Scholarships and bursaries normally assist the student in proceeding towards a degree, diploma, or other certificate of graduation. Normally, a student is not expected to do specific work for the payer in exchange for a scholarship or bursary.

On XXXXXXXXXX the Individual entered into MSA2 with Home Town where Home Town agreed to pay an amount for the Individual's tuition, books and living expenses. At the time the Individual was due to complete his/her medical residency in two months, on XXXXXXXXXX. As stated above scholarships are given to students to enable them to pursue their education. The amounts paid under MSA2 were paid to an individual that was a medical resident and therefore after he or she had completed his or her academic education. A medical residency is similar to an apprenticeship program for trades where apprentices are hired by employers and provided with on the job training that is designed to prepare the individuals so they can be certified or licensed in a trade. The medical resident is not a student.

Paragraph 56(1)(n) of the Act includes in income of the taxpayer the amounts on account of scholarships etc. that exceed the scholarship exemption for the year computed under subsection 56(3) of the Act. Subparagraph 56(1)(n)(i) of the Act reads in part "(i) the total of all amounts (other than amounts described in paragraph (q), amounts received in the course of business, and amounts received in respect of, in the course of or by virtue of an office or employment)". You have stated that the Individual is and was not employed by Home Town. You state that the individual is practicing family medicine in Home Town as an unincorporated self-employed sole practitioner as a member of a Family Health Team and is paid under an alternative funding program by the Ontario Ministry of Health. It is reasonable to consider that the amounts paid by Home Town were received by the Individual in the course of earning income from a business. The MSA2 was entered into on XXXXXXXXXX and the amounts were paid out on XXXXXXXXXX and shortly there after the Individual started practicing family medicine as an unincorporated self-employed practitioner in Home Town. Thus the amounts paid would not fall within the parameters of subparagraph 56(1)(n)(i) of the Act since an amount received in the course of earning income from a business is not included.

Paragraph 56(1)(r) of the Act requires that certain benefits and training-related amounts received by an individual in the year be added in computing income. These include earnings supplements provided under a project sponsored by a government or government agency in Canada to encourage individuals to obtain or keep employment.

The payments that were made under the MSA2 do not appear to be earnings supplements which are payments from the government to help individuals to get back into the work force by offering to supplement their earnings if they accept a lower paying job or to top up work-related earnings of low-income individuals to keep them in the work force. The Individual was not paid the amounts under the MSA2 to get them re-employed quickly or to top-up low wages. The amount paid under the MSA2 was an incentive paid by Home Town to get doctors to an underserviced area. Doctors would not have difficulty finding employment or work and they could not be described as low-income workers.

Interpretation Bulletin IT- 273R2, Government Assistance – General Comments deals with the tax treatment of inducements and other forms of government assistance received by a taxpayer in the course of earning income from a business or property. It discusses when such assistance is taxable and when it is not, and the effect of any repayments.

Paragraph 23 of IT-273R2 discusses the tax treatment of inducements paid to medical practitioners and states that government organizations may provide financial incentives to recruit health care professionals to practice in designated underserviced areas. Such grants are included in income under paragraph 12(1)(x) of the Act when none of the exceptions described in paragraph 8 applies.

None of the exceptions described in paragraph 8 of IT-273R2 appear to apply in this case. Home Town's primary interest was to induce the Individual to practice in Home Town and to accomplish this it offered an amount that not only covered the costs of breaking the contract that the Individual had under MSA1 but left an additional amount that was paid directly to the Individual. Therefore in our opinion, the amount was received from a government, Home Town, by the Individual in the year in the course of earning income from a business and the amount can reasonably be considered to be received as an inducement under paragraph 12(1)(x) of the Act.

In addition, if an amount is repaid by an individual in the year pursuant to a legal obligation to repay all or part of a particular amount included under paragraph 12(1)(x) of the Act in computing income for the year or a preceding taxation year that amount is allowed as a deduction in computing the individual's income from a business for a taxation year pursuant to paragraph 20(1)(hh) of the Act.

We trust these comments will be of assistance.

Yours truly,

Sharmini Ratnasingham
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch