15 November 2018 External T.I. 2017-0706531E5 - Research awards for undergraduate students

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: Under which provision should research awards granted to undergrad students be included in the recipient's income?

Position: It is a question of fact.

Reasons: It is generally the primary purpose of the award that will determine whether the payment is the result of an employee-employer relationship, or is either a scholarship or a bursary.

XXXXXXXXXX								2017-070653
E. Wirag, CPA, CMA
November 15, 2018

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your email regarding payments made to students of XXXXXXXXXX (the University), under the XXXXXXXXXX. Specifically, you have asked whether amounts paid by the University under the XXXXXXXXXX program would be taxable in the hands of a particular recipient. We apologize for the delay in responding.

Based on our telephone conversation of June 27, 2017 (XXXXXXXXXX/Wirag), a review of XXXXXXXXXX that you have provided, we understand the following regarding the XXXXXXXXXX:

• The award is intended to nurture interest and fully develop potential for a research career.
• The award allows a student to gain research work experience that compliments studies in an academic setting.
• The student must be registered in a bachelor’s degree program at an eligible university.
• The student may not be enrolled in an undergraduate professional degree program in the XXXXXXXXXX.
• The student must work under the supervision of a faculty member who holds an active research grant from XXXXXXXXXX or an eligible XXXXXXXXXX research grant;
• XXXXXXXXXX expects XXXXXXXXXX holders to work approximately the same hours on average and have the same working conditions as university employees, within the limitations of the type of research they are doing, and in consultation with their supervisor. If staff at the university in that department work 40 hour weeks on average, then the XXXXXXXXXX holder should too.
• Students should not receive academic credits for the work done during the term of a XXXXXXXXXX. Therefore, holders of these awards are not generally permitted to take courses during working hours throughout the term of their award. In particular, XXXXXXXXXX holders are not permitted to do thesis research during the term of the award.
• It is the university's responsibility to establish its own selection criteria within the broad guidelines that XXXXXXXXXX provides, and it may choose to apply stricter criteria.
• The value of the award is $XXXXXXXXXX provided by XXXXXXXXXX for a full XXXXXXXXXX period, plus an additional contribution of at least XXXXXXXXXX% provided by the university.
• XXXXXXXXXX provides the funds directly to the university, with the university providing the full value of the award, including its own contribution, to the student;
• The total value of the award (XXXXXXXXXX plus university top-up) is for the student’s personal use at their discretion. Students must not be expected to contribute to the costs of research, (equipment and supplies or travel) from their award;
• XXXXXXXXXX;
• XXXXXXXXXX at the University are paid to the students via payroll, every two weeks.

Our comments:

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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

The determination of the income tax treatment of payments such as those described in this letter involves a question of fact that can only be determined after reviewing all of the relevant documentation and agreements related to the program. However, based on the limited information provided to us, we are prepared to offer the following comments, which may be of assistance.

Generally, the amounts paid to undergraduate students as part of the XXXXXXXXXX program may potentially be considered to be either:

• a research grant as described in paragraph 56(1)(o);
• a scholarship or bursary as described in paragraph 56(1)(n); or
• employment income under subsection 5(1).

This determination should be made on the basis of the primary purpose for which the award was granted by reference to the terms and conditions attached to the award and the nature of the relationship between the recipient and the grantor.

Income Tax Folio S1-F2-C3, Scholarships, Research Grants and Other Educational Assistance (the Folio), available on the Government of Canada website, explains the Canada Revenue Agency’s position concerning scholarships, bursaries and research grants.

Research grants:

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, such as salary or wages paid to assistants; the cost of minor equipment and supplies; laboratory charges; and travelling expenses incurred by the taxpayer in the year for the purpose of carrying on the work.

As stated in paragraph 3.60 of the Folio, the term “research” for purposes of paragraph 56(1)(o), does not include research carried out for the sake of acquiring the experience or skill of conducting research, as may be the case with research carried out by undergraduate students. In order for a payment to be considered a research grant, the terms of the payment must establish that its primary purpose is to enable the recipient to carry out research.

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.

In our view, it seems unlikely that the XXXXXXXXXX is a research grant as the award is given to undergraduate students to nurture their interest and fully develop their potential for research and gain research work experience that compliments their studies in an academic setting, rather than to carry out research for its own sake. Also, the total value of the award, plus a university top-up, is for the students’ personal use at their discretion and not for the costs of research.

If the amount paid is not a research grant it is likely either student financial assistance or compensation for work done by an employee.

Scholarships or bursaries:

Scholarship, fellowship and bursary awards described in subparagraph 56(1)(n)(i) of the Act are a form of financial assistance that are intended to help students pursue their education, usually at a post-secondary school level for the purpose of obtaining a degree, diploma or certificate. However, fellowships are generally awarded to a graduate student.

Whereas the primary purpose of a research grant is research, we would consider an award to be a scholarship or bursary 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 bursary for purposes of subparagraph 56(1)(n)(i) of the Act. Normally, a student is not expected to do specific work for the payer in exchange for a scholarship or bursary.

We note that the student who holds a XXXXXXXXXX award must work under the supervision of a faculty member who holds an active research grant. Also, XXXXXXXXXX holders are to work approximately the same hours on average and have the same working conditions as university employees. Students do not receive academic credits for the work done during the term of a XXXXXXXXXX. Holders of these awards are not generally permitted to take courses during working hours throughout the term of their award and are not permitted to do thesis research during the term of the award. XXXXXXXXXX at the University are paid to the students through its payroll system. These factors, among others, would need to be taken into consideration to determine if the primary purpose of the award is to further the education and training of the recipient or if specific work is being conducted by the student where the primary purpose is to benefit the research activities of the University.

However, if an amount received is a scholarship or bursary, it should be noted that the student may be able to claim a scholarship exemption under subsection 56(3) of the Act for the full amount of a scholarship or bursary, provided it is received in connection with their enrolment in an educational program in respect of which they are considered a qualifying student (as defined in subsection 118.6(1) of the Act) in the tax year, in the immediately preceding tax year or in the following tax year. More information regarding the scholarship exemption can be found in the Folio.

Amounts received in a tax year in respect of a scholarship or bursary are included in income of the recipient under subparagraph 56(1)(n)(i) of the Act and reported in box 105 of a T4A Statement of Pension, Retirement, Annuity and Other Income by the payer, even though a student may be eligible for a full exemption under subsection 56(3).

Employment income:

Where the particular facts and circumstances indicate that an employment relationship exists between the recipient and the payer, an amount paid to an individual will be taxed as employment income 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 some of the factors that might indicate the existence of an employment relationship would be:

• intention of the worker and the payer when they entered into the arrangement, such as in a written agreement that indicates that the worker is an employee or an offer of employment;
• the payer has the right to exercise control over the worker, such as what research or clinical activities will be done and how and when they will be conducted;
• the payer assigns tasks to be done, such as rotations, on-call duties, teaching, resident coaching, etc.;
• the payer determines and controls the method and amount of pay to the worker;
• the payer provides benefit plans which are normally provided to employees, such as registered pension plans or group accident, health and dental insurance plans;
• the payer provides paid vacation leave and other work-related paid leave; and
• the worker must perform the work, not subcontract the work or hire assistants.

Amounts received in a tax year in respect of employment income are included in the income of the recipient and must be reported by the payer on a T4, Statement of Remuneration Paid (T4). The amount to be reported on the T4 is the amount that is received in a tax year by the recipient.

For information about requesting a determination as to whether an employment relationship exists, you may refer to the CPP/EI Rulings page of the Government of Canada website at: https://www.canada.ca/en/revenue-agency/services/tax/canada-pension-plan-cpp-employment-insurance-ei-rulings.html.

In summary, the nature and characterization of the amount received must be determined on a case-by-case basis, taking into account all of the relevant facts of the recipient’s situation including the primary purpose for which the award was granted to that recipient. The following questions need to be considered:

• Was the XXXXXXXXXX paid to the recipient by the University as compensation for work or student assistance?
• Was the relationship created between the recipient and the University one of employee/employer or student/educator?

While we do not have all the necessary information to make this determination, in our view, it appears that the XXXXXXXXXX amounts (both the amount received by the University from XXXXXXXXXX, and paid to the student recipient, and the top-up payment from the University) are likely either scholarship/bursary income, or if an employment relationship exists between the University and the recipient, employment income.

We trust our comments will be of assistance.

Yours truly,

Lita Krantz, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch