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. Whether a faculty member at a university that has research as part of their normal employment responsibilities, can allocate a portion of their salary as a self-funded research grant for purposes of section 56(1)(o)?
2. Does this also apply to faculty members on sabbatical?
Position: 1. It is a question of fact. 2. It is a question of fact.
Reasons: Each case would need to be reviewed to determine if the requirements discussed in Folio S1-F2-C3 are met. The research project must not be connected to or be part of the individual's normal employment responsibilities. A reduction in the employee's salary must be representative of the proportion of time they will not be performing their normal employment responsibilities.
Eric Wirag, CPA, CMA
July 31, 2014
We are replying to your email of October 22, 2013, in which you asked for clarification of paragraphs 3.62 and 3.63 of Income Tax Folio S1-F2-C3, Scholarships, Research Grants and Other Financial Assistance (the "Folio"), in the context of a self-funded research program at your university. We also acknowledge the additional information provided in your letter dated December 10, 2013.
Within the program, a faculty member (who is an employee) will forgo a portion of his or her salary and instead, receive a research grant to undertake a specific research project. The salary reported on the faculty member's T4 is reduced and a T4A is issued to the faculty member for the amount of the research grant.
Based on your review of the Folio paragraphs, you ask whether a faculty member can participate in the program when research activity is a normal part of the individual's terms of employment or if the faculty member is on a sabbatical leave.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Generally, any salary, wages and other remuneration received by a taxpayer in a taxation year must be included in the taxpayer's income from an office or employment by virtue of subsection 5(1) of the Act. This includes salary received for research activities that are part of the normal terms of employment. A research grant is included in income under paragraph 56(1)(o) of the Act to the extent that the grant exceeds the total of the allowable research expenses incurred in respect of that work.
As explained in the Chapter History to the Folio, the comments formerly included in paragraph 23 of Interpretation Bulletin IT75R4, Scholarships, Fellowships, Bursaries, Prizes, Research Grants and Financial Assistance have been expanded to clarify research-related sabbatical leave arrangements. The interpretative positions outlined in paragraphs 3.62 and 3.63 of the Folio have not changed since the publishing of IT75R4.
For the purpose of paragraph 56(1)(o) of the Act, the terms of the research grant must establish that the primary purpose of the grant is to carry out research. As explained in paragraphs 3.59 and 3.60 of the Folio, research involves a critical or scientific inquiry aimed at the discovery of new facts, or the development of new interpretations or applications.
When an amount is paid by the university to a faculty member, various additional factors must be considered to determine whether the amount paid is considered a research grant, as opposed to employment income, for the purpose of paragraph 56(1)(o) of the Act. These factors will also apply to faculty members on sabbatical leave.
First, when a faculty member undertakes a specific research project while retained on part salary, the research project undertaken must not be the type of research work ordinarily expected of the faculty member as part of his or her normal employment duties or under the terms and conditions of the employment contract.
Additionally, when a faculty member chooses to forgo a portion of their salary, it is expected that a portion of the employment duties will not be performed, and the amount of salary reduction for the faculty member will be commensurate with the reduction in normal employment duties. When an amount is received by a faculty member as a research grant, the amount received should be limited to the necessary research expenses required to conduct the research project. The amount of salary reduction should not necessarily be tied directly to the amount received as a grant.
It is a question of fact in each situation whether an amount paid to a faculty member is a research grant for purposes of paragraph 56(1)(o) of the Act. As mentioned, the clarification in the Folio does not represent a change in interpretation. In our view, when the requirements are met, certain amounts paid to faculty members under a program such as you described could be considered a research grant for purposes of paragraph 56(1)(o) of the Act.
We trust our comments will be of assistance.
Pamela Burnley, CPA, CA
Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
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