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) Whether a postdoctoral fellowship is exempt from tax under s.56(3) (the scholarship exemption). (2) Application of CPP/EI rulings process to Income Tax Act determinations for postdoctoral fellows.
Position: (1) Generally, no. (2) CPP/EI determinations are not determinative for application of scholarship exemption under the Income Tax Act.
Reasons: See discussion in letter.
2009-030856
XXXXXXXXXX E. Erskine
(613) 957-8973
April 28, 2010
Dear XXXXXXXXXX :
Re: Taxation of Income Received by Postdoctoral Fellows
This is in response to your letter of January 27, 2009, on behalf of the XXXXXXXXXX , regarding the taxation of income received by postdoctoral fellows. We apologize for the delay in responding, and we acknowledge our many telephone conversations and email exchanges with you and your colleagues, in particular, our conversations with yourself (Zannese/XXXXXXXXXX ), XXXXXXXXXX (Erskine/XXXXXXXXXX ), and XXXXXXXXXX (Erskine/XXXXXXXXXX ).
In this letter, all references are to provisions of the Income Tax Act (the "Act") unless otherwise specifically indicated.
Overview of Terms and Issues
As outlined in your letter, the terms "fellow" and "fellowship" are not easily defined, and there is a lack of uniformity of opinion across Canada as to what is understood by these terms. We are generally in agreement with you that the term "fellow" is commonly used in at least two distinct circumstances:
(1) The term is used (as in "postdoctoral fellow" or "PDF") to indicate an individual who has recently obtained his or her Ph.D. (usually within the last five years, although we understand that this timeline has increased), who is engaged in advanced research activities at a university or at a facility or laboratory connected with a university. The aim of the individual is often to obtain sufficient experience and published research as a postdoctoral fellow to be considered for a position as a professor at a university. In this letter, we refer to such individuals as "Academic PDFs".
(2) The term is used, usually on its own, to refer to an individual who has completed both the required academic and professional training to practice in a particular field (as with a medical doctor, for example), and who has been given a special grant to enable him or her to engage in specialized training or research. It is often a term of prestige. In your letter you refer particularly to fellows in the field of medicine who have been given amounts related to work in a highly specialized area, requiring regular clinical duties as medical doctors within a hospital setting. In this letter, we refer to such individuals as "Clinical Fellows".
In your view, the Canada Revenue Agency (the "CRA") should distinguish between income received by Academic PDFs and Clinical Fellows. In particular, you are of the view that while amounts received by Clinical Fellows may often be regarded as income from employment, amounts received by Academic PDFs are better viewed as scholarship income provided to students and, as such, eligible for the scholarship exemption found in subsection 56(3).
You have also commented that rulings have been issued by the CRA, for purposes of the Canada Pension Plan and the Employment Insurance Act, with respect to both Academic PDFs and Clinical Fellows. You note that these rulings consider whether or not an individual is in an employment relationship. These rulings are issued by officers in the Canada Pension Plan ("CPP") and Employment Insurance ("EI") area of the CRA and determine whether or not an individual has pensionable or insurable earnings for purposes of the CPP/EI legislation. In many cases, Clinical Fellows have been found to have pensionable and insurable earnings, while Academic PDFs have been found not to be in an employment relationship at all. You suggest that these CPP/EI rulings should be used for purposes of applying the relevant provisions of the Act (i.e., for income tax purposes), such that where CRA determines that an Academic PDF is not in an employment relationship for CPP and EI purposes, that individual should generally be considered to be a student with tax-exempt scholarship income. You are of the view that to have one position for CPP and EI purposes, and another for income tax purposes, would be unfair.
We understand that although it was not addressed in your letter of January 27, 2009, you are aware that amendments to the Act proposed in the 2010 Budget preclude Academic PDFs from claiming the scholarship exemption for tax years after 2009. Nevertheless, you would like us to clarify the situation with respect to the 2006 to 2009 tax years, taking into account the legislation and jurisprudence applicable for those years. Thus, our discussion, below, deals with the legislation and the CRA position as it was prior to 2010. Also, because you have raised the matter several times in our telephone conversations and email correspondence, we set out below, in a general way, why it is that some Academic PDFs may have thought that CRA "accepted" the scholarship exemption claimed, when in fact there was no intention on the part of the CRA to indicate such acceptance.
We note that although we can provide you with CRA's views regarding the income tax treatment of amounts received by Academic PDFs for the 2006 to 2009 tax years, questions regarding tax policy should be addressed to the Department of Finance.
Discussion
The CRA has never accepted that Academic PDFs are generally students with exempt scholarship income for purposes of income tax. We have written several letters to this effect, both prior to and after 2006, when most scholarship income became fully tax-exempt. The focus of the letters has varied between the nature of the income (as scholarship income, employment income, or research grants), and the role of postdoctoral fellows (as students, employees, or something else), however, the answer has generally been consistent. While we understand that there has been some confusion in the academic community arising from the CPP/EI Tax Court of Canada decision in Bekhor v. MNR, 2005 TCC 443 (referred to in your letter), and its significance for purposes of the scholarship exemption in the Act, the views of the CRA with respect to the application of the Act have not changed. We note that these views were clearly relayed to you and your colleagues in our various phone calls and other communications. While we agreed to reconsider our views, at no time was our income tax position changed or suspended.
In mid-2008, the Commissioner of the CRA provided a letter to the "Conférence des recteurs et des principaux des universités du Québec" (CRÉPUQ), effectively stating that the postdoctoral fellows described to the CRA by CRÉPUQ were not entitled to the scholarship exemption because they were not "students" as that term is used in the Act. This raised considerable concern in the academic community, and the comment was made that the CRA had previously "accepted" tax returns filed by Academic PDFs claiming the scholarship exemption. However, the fact that a tax return is not reassessed does not necessarily mean that the CRA agrees with the filing position taken by the taxpayer. While the CRA strives for consistency in application to the greatest extent possible, Canada has a self-assessing income tax system, which means that the CRA does not review every tax return filed. There are limitations as to what can be automated for review purposes, and the CRA must make choices about how to best allocate its audit resources. We can confirm that where the tax return of an Academic PDF is reviewed by a CRA officer, any claim for a full scholarship exemption will generally be denied.
There are two broad requirements for an amount to qualify for the scholarship exemption found in subsection 56(3). First, the amount must be an amount that is properly included in income under paragraph 56(1)(n) of the Act - that is, it must be a "scholarship, fellowship or bursary". 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)" - that is, the individual must qualify for an education tax credit that is connected to an educational program that is connected to the amount. If the individual does not qualify for the education tax credit, then the amount may be scholarship income but the individual's scholarship exemption will be limited to $500.
The nature of the income received by an 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 an Academic PDF, income 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 Academic PDFs to be either employment income or research grants. Also, prior to the full exemption being available for scholarship income in 2006, Academic PDFs often 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 ("RRSPs") (unlike scholarship income). Thus, for income tax purposes, there has never been a single, simple position with respect to income received by Academic PDFs. In some cases, the income received by an Academic PDF could be properly included in income under paragraph 56(1)(n); in most cases, we would expect either section 5 (for employment income) or paragraph 56(1)(o) (for research grants) to apply.
Assuming that paragraph 56(1)(n) does apply to an amount received by an Academic PDF, several questions must still be answered before the scholarship exemption can apply:
(1) Is the individual entitled to the education tax credit under subsection 118.6(2)?
(i) Is the individual a student (subsection 118.6(2))?
(ii) Is the individual enrolled in a "qualifying educational program" at a "designated educational institution" (definitions in subsection 118.6(1))?
(2) Is the education tax credit connected with an educational program that is connected to the amount (subsection 56(3))?
Generally, the CRA does not consider Academic PDFs to be "students" as that term is used in the Act. Rather, the CRA views Academic 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, Academic PDFs are most similar to apprentices, articling students, and medical residents. In each of these cases, the compensation paid to the individual is all or mostly taxable income. Please see further below for our comments with respect to why a finding that an Academic PDF is not an employee for CPP/EI purposes (which ruling may rely on the Bekhor decision referred to above), does not necessarily mean that the Academic PDF is either a "student", or entitled to the scholarship exemption, for purposes of the Act.
The CRA has not considered question (1)(ii), above, in detail, given its view with respect to question (1)(i). However, turning to question (2), above, we note that, even if an individual was entitled to an education tax credit, to meet the final condition of the scholarship exemption, the scholarship must be connected to the educational program that gave rise to the tax credit. Thus, even if the CRA found that, under certain circumstances, a particular Academic PDF was a student, and was enrolled in a "qualifying educational program" at a "designated educational institution", and was entitled to the education tax credit, it is not clear that an amount received by the Academic PDF would be considered to be connected to his or her enrolment in the educational program. The extent to which an amount received by an Academic PDF can be considered to be connected to an educational program, rather than to research (and other) services rendered to a university, laboratory, supervisor, or other paying entity, will depend on the particular situation. However, in our view, in many or most cases, the connection between the compensation received by an Academic PDF (which has been referred to many times by universities, academics and postdoctoral fellows alike as "salary"), and an educational program, will be so slight as to be insufficient to warrant the application of the full scholarship exemption.
In summary, in our view, an Academic PDF is more likely to receive employment income or research grants, for income tax purposes, than tax-exempt scholarship income. We are also of the view that the 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. For 2010 and following taxation years, the situation is even clearer, as Academic PDFs cannot qualify for the education tax credit. We emphasize that the amendments announced in the 2010 Budget with respect to post-doctoral fellows 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 postdoctoral fellows. This was confirmed by the Honourable James M. 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."
Finally, you have suggested that rulings given by the CPP/EI area of the CRA, which follow the Tax Court of Canada decision in Bekhor, should determine the nature of the income received by an Academic PDF, and whether an Academic PDF is a "student", for income tax purposes (and in particular for purposes of the scholarship exemption). We are unable to adopt this suggestion. A CPP/EI ruling only determines whether or not an individual is an employee with pensionable or insurable income. Even if such a ruling determined that a particular Academic PDF was not an employee, the ruling would not determine whether the individual was a student, or whether the income in question was scholarship income or a research grant, for purposes of the Act. Further, even if a CPP/EI ruling did determine that an Academic PDF was a "student" for purposes of the Act (which is not the case), this, in and of itself, would not mean that the other conditions required to obtain the scholarship exemption with respect to any particular amount had been met.
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 the 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 or not an Academic PDF may be a "student", with exempt scholarship income, for purposes of the Act, has not yet been directly addressed by Canadian courts.
We cannot comment on whether or not it is fair that an Academic PDF may be denied the benefits of both the CPP/EI legislation and the full scholarship exemption. Based on the discussion in Bekhor, it appears that if a university enters into an express employment relationship with its Academic PDFs, the Academic PDFs will be eligible for CPP and EI benefits (and subject to appropriate withholdings), assuming other required criteria are met.
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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