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. Is the amount paid to a PDF for non-teaching activities a scholarship, bursary or fellowship? 2. If yes, does a PDF qualify for the scholarship exemption?
Position: 1. Unlikely. 2. Unlikely.
Reasons: 1. In our view, PDFs usually receive either employment income or research grants. 2. We do not view PDFs to be students and thus they do not qualify for the ETC. Further we likely will not view the amount received as being "connected to the program".
XXXXXXXXXX
2008-030044
L. Zannese
(613) 957-2747
June 22, 2010
Dear XXXXXXXXXX :
Re: Income Tax Treatment of Post-Doctoral Fellows
This is in response to your letter dated November 13, 2008, in which you ask for our views with respect to the income tax treatment of amounts paid to post-doctoral fellows. We also acknowledge our telephone conversations regarding this issue (Erskine/XXXXXXXXXX ).
In particular, you ask for our views with respect to the following issues:
(1) Is a non-teaching stipend paid to a PDF an amount described in paragraph 56(1)(n) of the Income Tax Act (the "Act")?
(2) If the answer to the question above is yes, does the PDF qualify for the "scholarship exemption" contained is subsection 56(3) of the Act?
The situation outlined in your letter relates to a factual one, involving a specific group of taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. As explained during our preliminary telephone conversations, an advance income tax ruling cannot be provided with respect to your situation as it involves significant factual determinations. Although we cannot provide you with a definitive answer, we are prepared to provide the following general comments, which may be of assistance.
Our Comments
For purposes of our response, our comments are restricted to "academic" post-doctoral fellows ("PDFs"), that is, individuals who have recently obtained a doctorate (usually within the last five years), and who are engaged in advanced research activities at a university or at a facility or laboratory connected with a university. We understand that the term "fellow" may also apply to an individual who has completed both the required academic and professional training to practice in a particular field (for example, a medical doctor), and who has been given a grant to undertake specialized training or research. Our comments do not apply to these individuals, who are generally considered to be employees or self-employed persons for income tax purposes; these individuals would not qualify for the scholarship exemption.
As you are aware, the 2010 federal budget proposed amendments to the Act that expressly preclude PDFs from claiming the scholarship exemption for tax years after 2009. Our comments below are applicable to tax years prior to 2010, and focus on the legislation as it was at the time that you wrote to us.
(1) Paragraph 56(1)(n) Income
Paragraph 56(1)(n) of the Act includes in income the amount, if any, by which
(i) "...the total of all amounts (other than amounts described in paragraph (q), amounts received in respect of a business, and amounts received in respect of, in the course of or by virtue of an office or employment) received by the taxpayer as or on account of a scholarship, fellowship or bursary or prize for achievement in a field of endeavour ordinarily carried on by the taxpayer (other than a prescribed prize),
exceeds
(ii) the taxpayer's scholarship exemption for the year computed under 56(3);"
The nature of the income received by any individual must be 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 for non-teaching activities will most likely be considered to be employment income, research grants, scholarship income, or some combination of these types of income. In the past, the CRA has generally considered income received by PDFs to be either employment income or research grants for purposes of the Act. Historically, it is our understanding that many PDFs asked for amounts to be classified as research grants, rather than employment income or scholarship income, as research grants were allowed deductions for certain expenses (unlike employment income), while still qualifying as earned income for purposes of contributions to registered retirement savings plans (unlike scholarship income). Thus, for income tax purposes, there has never been a single, simple position with respect to income received by PDFs. In some cases, the income received by a PDF could be included in income under paragraph 56(1)(n) of the Act; in most cases, we would expect either section 5 of the Act (for employment income) or paragraph 56(1)(o) of the Act (for research grants) to apply. As discussed below, even if the income in question were scholarship income, a PDF would usually only be entitled to claim a $500 scholarship exemption with respect to the income.
(2) Scholarship Exemption
Even if paragraph 56(1)(n) of the Act does apply to an amount received by a PDF, several other issues must still be considered in order to determine whether the PDF is entitled to the full scholarship exemption provided by paragraph 56(3)(a) of the Act, rather than being limited to the $500 exemption allowed by paragraph 56(3)(c) of the Act:
a. Is the PDF entitled to the education tax credit under subsection 118.6(2) of the Act?
1. Is the individual a student (subsection 118.6(2))?
2. Is the individual enrolled in a "qualifying educational program" at a "designated educational institution" (definitions in subsection 118.6(1) of the Act)?
b. Is the amount paid to the PDF connected with the educational program for which the PDF may claim the education tax credit (subsection 56(3))?
Generally, the CRA does not consider PDFs to be "students" as that term is used in the Act. Rather, the CRA 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. In our view, PDFs are most similar to apprentices, articling students (for accounting and law), and medical residents. In each of these cases, the compensation paid to the individual is all or mostly taxable income.
The CRA has not reviewed in any detail whether a PDF may be considered to be enrolled in a "qualifying educational program" at a "designated educational institution", given the CRA's view that PDFs are not students. You asked in your letter whether a general "program" established by a university for PDFs, which includes certain general interest (i.e. non-field specific) courses together with supervised research, could be a "qualifying educational program". Whether any particular program meets that definition is a question of fact. What you have outlined in your letter could be an "educational program"; however, we are unable to provide you with a definitive answer on this point. Whether any program is a "qualifying educational program" is a determination that can only be made based on the situation of a specific taxpayer.
Regarding question (b) above, we note that even if a PDF qualified for the education tax credit for a particular year, the scholarship income received would still have to be connected to the educational program for which the PDF could claim the education tax credit in order for the PDF to obtain the full scholarship exemption. It is not clear to us that all or any of the income received by a PDF would be considered to be connected to an educational program, rather than provided as compensation for other activities undertaken by the PDF. The extent to which an amount received by a PDF could be considered to be connected to an educational program, rather than paid in support of research services or other services rendered to a university, laboratory, supervisor or others depends on the particular situation. However, it is our view that in many or most cases, the connection between the compensation received by a PDF (which has often been referred to by universities, academics and PDFs as "salary"), and an educational program, will be insufficient to allow the application of the full scholarship exemption. We distinguish between research undertaken toward a degree and professional research whenever and wherever undertaken.
Despite the above issues, we understand that some universities have been providing Form T2202A (the Tuition, Education and Textbook Amounts Certificate), to PDFs. The fact that an individual has received and filed this form does not mean that the individual will ultimately be allowed the scholarship exemption. Upon review, the CRA may deny the exemption; under most circumstances, the CRA has up to three years for such a review. However, Canada has a self-assessing income tax system, which means that while the CRA strives for consistency for all taxpayers in similar situations, individuals are responsible for the correct completion and filing of their own individual income tax returns. We can confirm that where the tax return of a post-doctoral fellow is reviewed by the CRA, a claim for a full scholarship exemption will generally be denied.
In your letter, you suggested that the Tax Court of Canada decision in Bekhor v. MNR, 2005 TCC 443, should be considered when determining the nature of the income received by a PDF, and whether a PDF is a "student" for income tax purposes (and in particular for purposes of the scholarship exemption). We are unable to adopt this suggestion. Although the CRA administers the Canada Pension Plan and the Employment Insurance Act, these statutes are separate from the Act. Each statute must be interpreted based on its own wording and within its own policy context. We note that the only issue before the court in Bekhor was whether the individual held pensionable, insurable employment for purposes of the Canada Pension Plan and Employment Insurance Act. Consequently, any comments made by the court with respect to provisions of the Act do not form part of the ratio, or legal basis, for the decision. Whether a PDF may be a "student" with exempt scholarship income for purposes of the Act has not yet been directly addressed by the Canadian courts.
In summary, in our view, a PDF is more likely to receive employment income or research grants, for income tax purposes, than scholarship income. We are also of the view that the full scholarship exemption will not apply in most cases even where the income is scholarship income, because either the individual will not be entitled to the education tax credit, or the income received will not be sufficiently connected to an educational program for which an education tax credit is available. These views apply to taxation years up to and including 2009, and in particular to 2006 to 2009. We emphasize that the amendments announced in the 2010 federal budget with respect to PDFs and the scholarship exemption were clarifying in nature and did not indicate a change in either interpretation or tax policy. To the best of our knowledge, the full scholarship exemption was never intended to apply to PDFs. This was confirmed by the Honourable James Flaherty, Minister of Finance, to the House of Commons, on March 23, 2010:
"Mr. Speaker, there has been no change in the tax policy in Canada with respect to post-doctoral fellowships. It is exactly the tax policy that was followed by the Liberal government. ... Pure scholarships are not taxable in Canada. However as we know, post-doctoral fellows work."
We trust that these comments will be of assistance.
Yours truly,
Eliza Erskine
Manager
Non-Profit Organizations and
Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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