26 April 1995 Internal T.I. 9414306 F - FELLOWSHIP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		April 26, 1995

	Enquiries 	Rulings Directorate
	International Taxation Office	M.D. Gervais
	2540 Lancaster Road	7-941430

Attention: Dan Pavelic

Paragraph 115(2)(a) of the Act - Fellowships

This is in reply to your letter of May 31, 1994, wherein you requested our opinion concerning the interpretation of paragraph 115(2)(a) of the Act, particularly as it applies, to non-resident clients in receipt of fellowship income.

You raise the following two questions:

1) What is the intention of paragraph 115(2)(a) of the Act and IT-420R3 subparagraph 19a) with regard to the taxation of non-resident individuals in receipt of fellowship income where it is not clear if the individual is in full-time attendance at a qualifying educational institution (other than a university or college)?

2) How can it best be determined that the income is effectively a fellowship as described in paragraph 8 of IT-75 (now paragraph 10 of IT-75R3) and is therefore not considered to be income from employment?

You are currently working on specific cases of individuals who are at the post-doctoral level of education. The majority of the fellowships are awarded by the Natural Sciences and Engineering Research Council of Canada (NSERC) and the Medical Research Council. Both are federal government bodies.

The first case involves a treaty resident of the United States who received a fellowship (for the purpose of giving him training) provided by the Medical Research Council for study at the XXXXXXXXXX According to you, the institute is not listed in the Employment and Immigration list of certified institutions. You would like to know if that person could be considered in full-time attendance per paragraph 11 of IT-82R3 and if the institute could be considered a qualified educational institution.

The second case involves a program of visiting fellowships in Canadian government research laboratories. In this regard, you attached a letter dated May 21, 1992, issued by the NSERC, a federal Department, on their official letterhead. The document is entitled " Statement on the Program of Visiting Fellowships in Canadian Government Laboratories" and provides a description of the Program of Visiting Fellowships, presumably for the benefit of applicants. You would like to know, given the fact that these individuals receive their training at government departments, whether the income from this source would be considered employment income or whether it would be a fellowship as described in paragraph 10 of IT-75R3.

The third case involves an NSERC research grant given to a university. The university in turn gives the money to one of its professors. The professor in turn uses part of it to pay a living allowance and travelling expenses to a non-resident professor so that the two can exchange ideas while conducting research together. You have attached an opinion on a previous case and you would like to know if it is still valid in a situation where an argument could be made that the visiting academic is an employee because one or all of the control, economic reality, specific result, integration and tools tests are satisfied.

Our Comments

Paragraph 115(2)(a) of the Act

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The question of whether an individual is in full-time attendance at an educational institution that is a college or university is fundamental in these circumstances and must be clearly determined before he can be taxed pursuant to paragraph 115(2)(e) of the Act. Such a determination is a question of fact that must be determined on a case by case basis. In accordance with paragraph 9 of IT-82R3, students are ordinarily regarded as being in "full-time attendance" if the university regards them as such.

Paragraph 3 of IT-82R3 states that there is no established list of institutions that qualify as educational institutions. The District Taxation Office is best able to make judgments concerning an institution's eligibility. Unless there is specific information to the contrary, an institution whose name includes the words "university" or "college" is usually accepted as satisfying the requirement, provided that courses are provided at a post-secondary school level. An educational institution may include a professional organization that provides educational courses to members, provided that one minimum qualification for membership is secondary school graduation. An educational institution is not disqualified solely by reason of the fact that it provides other courses in addition to post-secondary school level courses.

Fellowship versus Employment Income

In regards to your second question, it is our view that the only way to determine if income is fellowship or employment income is to examine the relationship between the parties and the nature of the agreements. It is the nature of the payment rather that the name given to it that determines whether an amount is included in income under paragraph 56(1)(n) or (o) of the Act or as income from employment or income from a business.

A fellowship is an amount paid or a benefit given to persons to enable them to advance their education. It is generally awarded for doctoral studies or postdoctoral work. We note that paragraph 56(1)(n) of the Act specifically excludes amounts received in the course of employment since such amounts would be treated as income from employment. If the primary purpose of the award is to further the education and training of the recipient in his or her individual capacity, such as studying for a doctoral degree, the award is included in income under paragraph 56(1)(n) of the Act as fellowship income even though research is undertaken as a means to achieve that purpose. A research grant is an amount received to enable a taxpayer to carry on research or any similar work. If the primary purpose of the award is the carrying out of research, the award may be considered as a research grant and included in income under paragraph 56(1)(o) of the Act unless such award constitutes income from employment.

Income from employment on the other hand results from a contract of service between an employee and his employer. The services requested by the employer are provided by the employee in return for remuneration, and a master\servant relationship develops. The services are rendered primarily for the benefit of the employer and the payments represent essentially consideration for the services based usually on time spent providing the services or the value or volume of services. This differs markedly from fellowships and research grants which are granted primarily for the benefit of the recipient, and without the usual contractual obligations between the parties in an employer and employee relationship. Where the relationship is one of employer and employee (the control, economic reality, specific result and integration and tools tests are satisfied) the payment will be considered as income from employment rather than fellowship or research grant.

We recognize that in some situations it may be difficult to delineate the nature of the relationship between the parties since the conditions of the awards can resemble the conditions of employment. When this happens, it may be necessary to carefully examine all the facts before challenging a position adopted by a taxpayer.

Specific Cases

Concerning the first case under study, we do not have enough information concerning the Medical Research Council to determine if it constitutes a post-secondary school level institution. We do not have any information concerning the Employment and Immigration list of certified institutions you are referring us to, and do not know whether and to what extent if any, that list can be relied upon in determining whether an institution is a qualified educational institution under the Act. In case of doubt, you may wish to contact the institution directly or the closest District Office to verify the institution's eligibility.

In the second case submitted, the question of determining whether the individuals should be considered employees or whether the primary purpose of the payments is to further the education and training of the recipients or to enable them to carry on research is a question of fact. Based on the document provided by the NSERC however, it appears as if the visiting individuals are not considered employees of the government department at which they work and that the awards are regarded as fellowships or research grants. The Statement on the Program of Visiting Fellowships in Canadian Government Laboratories (hereinafter the "Statement"), issued by the NSERC provides in part as follows:

"The Visiting Fellowships program is a program of postdoctoral fellowships in the research laboratories of the following Federal Departments and Agencies:...

...The program is administered by the Natural Sciences and Engineering Research Council (NSERC) on behalf of the participating Departments. Funds are provided by the Departments and channelled through NSERC to the Fellows. These cover travel to the location of tenure of the award and a stipend, to cover living expenses. The stipend is paid on a quarterly basis. The amount is based on a formula applied to the starting salary of a Government Research Scientist (RES-1 level). Direct and indirect research costs (supplies, space, equipment) are the responsibility of the laboratory.

NSERC coordinates an annual competition for fellowships and administers the financial aspects of the program; the Departments select the Fellows, according to their research interests and priorities.

Successful fellowship holders are not employees of the Government Department at which they work, nor of NSERC."

If this information reflects the true relationship between the parties, the payments made to the non-residents may effectively be fellowships, and accordingly may not be taxable pursuant to subsection 115(2) of the Act unless the individuals are also in full-time attendance at a university or college. However, the Statement represents only a description of the program provided by the NSERC and may or may not accurately reflect the nature of the payments to visiting individuals and their relationship to the government departments involved. From the Statement alone, it does not seem possible to rule out the possibility that the relationship between the government departments involved and the recipient is one of employer/employee (contract of service). The payments are therefore potentially taxable as income from employment in Canada pursuant to subsections 2(3), 115(1) and 5(1) of the Act. In addition, even if an individual is not an employee of NSERC or of any government department, the agreement between the recipient and NSERC could conceivably be a contract for research services to be performed in Canada. On this question, we will not speculate as we have not had the opportunity to examine in detail the relationship between the parties.

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In addition, you may wish to consider whether the recipients are really non-residents of Canada if they sojourn in Canada for 183 days or more. In this regard, you should consider the deeming rule in paragraph 250(1)(a) of the Act and the relevant tax treaty provision, if any, on the subject of dual residence of taxpayers.

Concerning the third case, if the non-resident can be regarded as being employed in Canada by virtue of his relationship with an employer, then payments received should be regarded as employment income, taxable in accordance with subsections 2(3) and 5(1) of the Act. We are unable, based on the limited facts given, to offer a definitive opinion on this question. We might speculate however that if the sums are in effect given strictly to pay the travelling expenses and to provide a reasonable living allowance for occasional or temporary visits, that the relationship is probably not one of employer\employee.

We hope these comments will be of assistance to you. Should you require any further information or clarification on any of our comments, please do not hesitate to contact us.

We apologize for the delay in responding to your inquiry.

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch