21 July 2010 Internal T.I. 2010-0369991I7 - Taxation of Post-Doctoral Fellowships

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 fellowship is exempt from tax (scholarship exemption subsection 56(3)).

Position: Generally, no.

Reasons: See discussion in document and attachments.

			July 21, 2010

	Taxpayer Services Directorate				HEADQUARTERS
	750 Heron Road, 7th Floor				Income Tax Rulings
	Ottawa  ON  K1A 0L5		  				Directorate
									Lori Merrigan
	Attention:  Mr. Jefferey Haynes			(613) 957-8979

									2010-036999

Taxation of Post-Doctoral Fellowships

This is in response to your correspondence of June 3, 2010, regarding questions you received from XXXXXXXXXX of theXXXXXXXXXX concerning the taxation of income earned by a post-doctoral fellow ("PDF").

As you know, the 2010 federal budget proposed amendments to the Income Tax Act (the "Act") that expressly preclude PDFs from claiming the scholarship exemption for tax years after 2009. These amendments were clarifying in nature and did not indicate a change in either interpretation or tax policy. To that extent, we are concerned with XXXXXXXXXX 's comments in Question 5 of her document with respect to the date that the clarifying measures in the 2010 federal budget will take effect. Her comments indicate that the "new measures" will take effect retroactively to February 2010 and suggest that only payments made on or after that date will be affected. However, while it is true that the amended wording will only apply to tax years after 2009, it is our view that fellowships paid to PDFs have generally always been taxable, including in particular the 2006 to 2009 taxation years (most scholarship income became tax-exempt for taxation years after 2005).

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 the income received will most likely be employment income, research grants, scholarship income, or some combination of these types of income. Our views concerning the taxation of income received by a PDF are outlined below:

• In order to qualify for the full scholarship exemption under subsection 56(3) of the Act, first, the amount must be properly included in income under paragraph 56(1)(n) of the Act and, second, the amount must be "received in connection with the taxpayer's enrolment in an educational program in respect of which an amount may be deducted under subsection 118.6(2)" (i.e., the individual must be able to claim the education tax credit).
• In regards to the application of paragraph 56(1)(n) of the Act, the nature of the income is determined on a case-by-case basis, however, in the case of a PDF, income is generally considered to be employment income or research grants (i.e., paragraph 56(1)(n) usually will not apply).
• Even if some of a PDF's income is considered to be scholarship income, the PDF will likely only qualify for a $500 exemption. To qualify for the full scholarship exemption, the individual must meet the conditions of section 118.6 of the Act, that is, he or she must qualify for the education tax credit. In order to do so, the individual must:
• be a student;
• be enrolled in a "qualifying educational program" at a "designated educational institution" (definitions in subsection 118.6(1) of the Act); and
• obtain a Form T2202A, Tuition and Education Amounts Certificate, from the "designated educational institution".
• The Canada Revenue Agency does not generally consider PDFs to be students as that term is used in the Act. Therefore, regardless of whether a PDF is at a "designated educational institution" (a university) or may be viewed as enrolled in an educational program, the PDF usually would not meet the requirements that would allow him or her to obtain a full scholarship exemption.
• Even if an amount received by a PDF is considered to be scholarship income (i.e., paragraph 56(1)(n) income) and the PDF is entitled to an education tax credit, the PDF still will not qualify for the full scholarship exemption unless the amount is connected to the particular educational program for which the education tax credit is claimed. In most cases, the full amount of a PDF's income will not be sufficiently connected to a particular "qualifying educational program" to allow the income to be exempt from tax.

In addition to our comments above, we have enclosed copies of three of our recent letters (our file numbers 2009-030856, 2009-030899 and 2008-030044), concerning the taxation of post-doctoral fellowships, which may be of assistance in formulating your reply to XXXXXXXXXX 's inquiry.

We trust that our comments will be helpful to you.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity.

Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.

Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch