27 October 2011 External T.I. 2011-0404241E5 - PDF - Deductibility of expenses

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: Whether a post doctoral fellow (PDF) can apply a number of expenses, primarily travel, against the funding he received for a post doctoral fellowship.

Position: Question of fact.

Reasons: The deductibility of expenses depends on the nature of the income received and the type of expenses incurred by the PDF, which can only be determined on a case-by-case basis taking into account all of the relevant facts of the individual's situation.

XXXXXXXXXX 							2011-040424
								Ananthy Mahendran
October 27, 2011

Dear XXXXXXXXXX :

Re: Deductibility of Expenses related to a Post Doctoral Fellowship

We are writing in response to your correspondence dated April 27, 2011, wherein you asked our opinion as to whether a post doctoral fellow (PDF) can apply a number of expenses, primarily travel, against the funding he received from the XXXXXXXXXX for a post doctoral fellowship.

Our Comments:

The Canada Revenue Agency's (CRA) general views regarding the tax treatments of fellowships and research grants can be found in Interpretation Bulletin IT-75R4, titled Scholarships, Fellowships, Bursaries, Prizes, Research Grants and Financial Assistance. Depending on the nature and circumstances of the payment, the bulletin explains how each should be treated for tax purposes, including what amounts must be included in income and the deductibility of related expenses. Specifically, paragraphs 11 to13 of IT-75R4 deal with fellowships, paragraphs 21 to 24 discuss amounts received as research grants, and paragraphs 31 to 36 address the deductibility of research expenses.

According to the bulletin, the tax treatment of a fellowship depends upon the primary purpose for which the fellowship was granted as determined by reference to the terms and conditions attached to the award. 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 subparagraph 56(1)(n)(i) of the Income Tax Act (the Act) to the extent that it exceeds the scholarship exemption described in subsection 56(3) of the Act, even though research is undertaken as a means to achieve that purpose. Generally, the CRA does not consider PDFs to be "students" as that term is used in the Act. Rather, it views PDFs to be the same as other individuals who are required to undertake a period of paid training after completing their studies prior to pursuing an independent professional career. Therefore, a PDF would generally be limited to a maximum scholarship exemption of $500 allowed under paragraph 56(3)(c) of the Act. On the other hand, if the primary purpose of the award is to carry out research 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 is included under paragraph 56(1)(o) of the Act only to the extent that it exceeds the total of the allowable research expenses incurred by the taxpayer in the year for the purpose of carrying on the work. However, if a recipient of a grant is an employee of the grantor and whose duties of employment include research responsibilities, the amount received is not considered to be a research grant but an employment income which is included in the recipient's income under subsection 5(1) of the Act. If this situation occurs, no expenses, other than in very limited circumstances certain expenses permitted by section 8 of the Act, are deductible by the employee against the employment income received under subsection 5(1) of the Act.

Where a taxpayer has received amounts that are included in income under paragraph 56(1)(o), certain research expenses may be deducted against the research grant received. Paragraph 56(1)(o) provides that allowable research expenses do not include personal and living expenses of the taxpayer, expenses for which the taxpayer has been reimbursed, and expenses that are otherwise deductible in computing the taxpayer's income. However, this provision does consider travel expenses incurred by the taxpayer "while away from home" in the course of carrying on the work as allowable research expenses. The phrase "while away from home" in subparagraph 56(1)(o)(i) is not defined in the Act and thus should be interpreted in its ordinary sense. Accordingly, it refers to a period when one is away from the place where one lives. However, in understanding subparagraph 56(1)(o)(i), it is important to consider the entire phrase "while away from home in the course of carrying on the work". This means that travel expenses incurred by a taxpayer for travelling between his or her home and the place where the work is mainly carried out are not allowable research expenses for purposes of paragraph 56(1)(o), since they are not incurred in the course of carrying on the taxpayer's business.

As noted in paragraph 33 of IT-75R4, if a taxpayer establishes a temporary base in a place other than his or her home, the taxpayer may be considered to be temporarily residing in that place (sojourning) rather than travelling. The determination of whether a taxpayer is travelling or sojourning is a question of fact that can only be made after considering factors such as the type of accommodation, the length of stay, the existence of a permanent home elsewhere and the location of the taxpayer's family. If a taxpayer is temporarily residing in a place, amounts paid for meals and lodging in that place are considered to be personal and living expenses rather than travelling expenses and therefore, they are not allowable research expenses. However, a taxpayer in receipt of a research grant is entitled to claim his or her own expenses for (1) travel between his or her (permanent) home and the place where he or she temporarily resides while engaged in the research work, (2) travel from one temporary location to another, and (3) travel on field trips connected with the work.

In conclusion, generally, the nature of the income received by an individual is determined on a case-by-case basis taking into account all of the relevant facts of the individual's situation. In the case of a PDF, it is our view that income received will most likely be considered to be employment income, research grants, scholarship or fellowship income, or some combination of these types of income. The facts given to us do not indicate the terms of the award or the nature of the work the PDF undertook for the income he received. Depending on the terms of the award, if the funding received by the PDF is for research, then it will be included in his income under paragraph 56(1)(o) and his allowable research expenses will be applied against the funding he received.

We trust that our comments will be of assistance.

Yours truly,

Sharmini Ratnasingham
Assistant Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch