23 June 2010 External T.I. 2010-0366441E5 - Taxation of Medical Residents - Grants

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: Is an amount received by a medical resident for an agreement to practice (return of service) in an underserviced area taxable?

Position: Yes.

Reasons: The amount, while linked to tuition, appears to be an inducement to practice in an underserviced area and is not a scholarship or bursary. The amount appears to be taxable, likely as employment income or as a government incentive.

XXXXXXXXXX 							2010-036644
								P. Burnley
								(613) 957-2100
June 23, 2010

Dear XXXXXXXXXX :

Re: Free Tuition Program (Ontario Ministry of Health and Long-Term Care)

This is in response to your email correspondence of May 5, 2010, inquiring about the taxation of an amount received by your son from the "Free Tuition Program for Physicians" offered by the Ontario Ministry of Health and Long-Term Care (the "ON Ministry"). It is your understanding that your son was assessed income taxes on the amount received which, in your view, was either incorrect or inappropriate.

The situation outlined in your letter relates to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings". This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. As discussed in our telephone conversation with you of May 4, 2010 (XXXXXXXXXX/Erskine), although we cannot comment directly on your son's specific situation, we are able to provide the following general comments, which may be of assistance.

According to the information available on the ON Ministry website regarding the program, grants are offered to medical students in their final year, medical residents and newly graduated physicians (the "applicants"). The applicants must have attended a Canadian medical school and have been or be enrolled in a residency program funded by the Ministry of Health in one of the provinces of Canada. The amount paid is equal to the medical school tuition paid by the applicant (the "main program grant"), up to a maximum amount, in exchange for agreeing to full-time practice for three or four years ("return of service") in an underserviced or undersupplied community upon graduation and licensure. The maximum amount depends on whether the return of service agreement is for three or four years. The amount is paid to the applicant once the application is approved, but no earlier than the end of the final year of medical undergraduate studies.

If the applicant's medical school tuition costs do not reach the maximum amount allowable under the program, an additional amount, the "Location Incentive Fund Grant", is available; this grant makes up the difference between the main program grant and the maximum amount. The Location Incentive Fund Grant is paid once the applicant begins the return of service period.

An applicant must sign a contract agreeing to the return of service in an underserviced or undersupplied community before any funds will be paid under the program and the applicant must secure his or her own position within that community. If the applicant breaches the return of service commitment, he or she must repay the program grants with interest as well as an administration fee of $5,000.

The ON Ministry website relating to the program states:

"The funds provided through the Free Tuition Program and the Location Incentive Fund are subject to federal and provincial income tax. Applicants will be provided with the option of a lump sum payment or deferred payments (over up to a four-year period) to minimize tax implications."

Generally, amounts received as income by a resident of Canada are subject to federal taxation unless the amounts are specifically excluded or exempted from taxation. For 2006 and subsequent years, most scholarship, fellowship and bursary income is exempt from income tax subject to certain criteria; in particular, the recipient must be able to claim the education tax credit. However, even if the education tax credit is available, an amount must be determined to be a scholarship, fellowship or bursary before this tax exemption applies. Whether an amount received by a person is employment or business income, a scholarship, fellowship or bursary, property income, or any other type of income, will depend on the facts of the particular situation.

As stated in paragraph 6 of Interpretation Bulletin IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, Research Grants and Financial Assistance:

"Scholarships and bursaries are amounts paid or benefits given to students to enable them to pursue their education... Normally, a student is not expected to do specific work for the payer in exchange for a scholarship or bursary."

In the situation described in your correspondence, it appears that the amount received, while linked to the amount of tuition paid, was applied for and received at the end of, or after the applicant had completed, medical school. It is unlikely that the amount could be considered to have been received to enable a student to pursue his or her education. The amount appears to have been received to encourage the applicant to practice in an underserviced or undersupplied community. Consequently, the amount received would not be considered to be a scholarship, fellowship or bursary. This conclusion is supported by the fact that a Location Incentive Fund Grant is available to top up the main program grant to the maximum amount, which means that the amount received by a successful applicant is not ultimately determined by tuition paid, but is determined by the length of the return of service agreement.

Additionally, an amount cannot be a scholarship, fellowship or bursary, and exempt from tax, if it is received by virtue of an office or employment. Since amounts under the program cannot be received until a return of service agreement (or agreement to practice) in an underserviced area is in place and approved by the ON Ministry, these amounts may be considered to be received by virtue of an office or employment, in which case the amounts would be taxed as employment income.

Certain amounts that can be considered financial assistance provided by a government are included in income under subparagraph 56(1)(r)(i) of the Income Tax Act (the "Act"). This provision of the Act taxes earnings supplements provided under a project sponsored by a government or government agency to encourage an individual to obtain or keep employment. This provision could apply to amounts that have been determined not to be scholarships, fellowships or bursaries as previously discussed.

Finally, Interpretation Bulletin IT-273R2, Government Assistance -- General Comments, outlines the taxation of certain inducements, reimbursements, contributions, allowances, grants or other financial assistance received by a taxpayer that are to be included in business or property income. Specifically, paragraph 23 of the bulletin states:

"Government organizations may provide financial incentives to recruit health care professionals to practice in designated underserviced areas. Such grants are included in income under paragraph 12(1)(x) when none of the exceptions described in ¶ 8 applies."

The exceptions found in paragraph 8 of the bulletin relate to prescribed amounts, amounts otherwise included in income, or amounts that reduce the capital cost of property or an outlay or expense (none of which appear to apply to the grants discussed in this letter).

In conclusion, we are of the view that the amount received by your son was likely taxable, either as employment income, financial assistance provided by a government or a government incentive. The amount does not appear to be tax-exempt scholarship income, due to the timing and conditions of the grant. A final determination of the nature of the amount paid to your son and the taxation of that amount can only be made by your son's local Tax Services Office. Information regarding objections or appeals relating to an income tax assessment can be found in pamphlet P148, Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act.

The CRA is responsible for the administration and enforcement of income tax legislation, whereas the Department of Finance is responsible for developing and evaluating federal tax policy and legislation; therefore, we are unable to comment with respect to whether it is appropriate for medical residents to be taxed on amounts such as the grants discussed in this letter.

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