5 October 1995 External T.I. 9514365 - DEPOSIT OF FUNDS INTO PROF'S RESEARCH A/C

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether a "deposit" of funds into an account for research or creative purposes where fund is in employee's name is required to be included in employee's income under ss 5(1) of the Act

Position TAKEN:

Question of fact. Insufficient information provided. Advised to take documentation to TSO or request Ruling if it is a proposed transaction. General comments only provided re. 5(1), 56(2), research grants

Reasons FOR POSITION TAKEN:

		951436
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX

October 5, 1995

Dear Sirs:

Re: Subsection 5(1) of the Income Tax Act

This is in reply to your request for a technical interpretation dated May 23, 1995 concerning subsection 5(1) of the Income Tax Act. We apologize for the delay in responding. You have asked that we consider the following hypothetical situation:

A collective agreement provides that a professor may choose to arrange his or her credited teaching activities according to three options. One of the options provides that the professor may assume 12 credits and more per year but not more than 18.

Where a professor chooses this option, for each 3 credits assumed over 12 credits per year, a sum of $3,500 will be deposited into a fund in the professor's name for research or creative purposes, which include research or creative activities intended for pedagogical development or service to the community. The sums deposited in the fund are in the professor's name and must be used by the professor in accordance with institutional rules and policies made by the university.

Where the professor chooses not to use all or part of his or her accumulated teaching credit reserves or all or part of the funds accumulated, he or she must advise his or her department. At the choice of the persons concerned, these funds or credits will be deposited for research or creative purposes or for community service purposes to a committee so that the latter may redistribute the funds. The collective agreement provides that whatever option a professor chooses, all teaching activities over and above 12 credits per year are assumed without additional remuneration. The collective agreement provides for the crediting of these funds into a research account in the name of a professor for future use by that professor. The professor has control over the funds in the research account in his or her name to the extent that he or she is the senior adviser as regards withdrawal of funds from the account.

It is your opinion that subsection 5(1) of the Act does not apply to this situation. You have cited MNR v. Rousseau 60 DTC 1236 (Ex. Ct.) as support for this argument. You have opined that entries in the University's books crediting amounts to a research fund in the name of a professor does not constitute a security in satisfaction of debts or a receipt by the professor of the amounts credited to the research fund. Since the professor does not receive the amounts credited to the account in his or her name, the amounts should not be taxable in that year pursuant to section 5 of the Act.

Our Comments

It would appear that the above situation relates to an actual situation. We are unable to definitively reply to such a query as we have not had the opportunity of reviewing all the facts and related supporting documentation. Such a review is ordinarily conducted by the local tax services office where the query relates to a completed transaction, or by this office where it is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2 and the special release dated September 30, 1992 thereto. We nevertheless offer the following general comments which may be of assistance to you.

As noted by you, an amount is not included in income under subsection 5(1) of the Act if it has not been received in the year. Amounts not actually received by an employee may be included in income under the doctrine of "constructive receipt".

Subsection 56(2) will apply where a payment to which an employee is otherwise entitled is directed to be made by that employee to a research account - whether in the employee's name or not. However, in circumstances where an employee's control of an amount is subject to substantial restrictions, the amount would not be considered "received" or constructively received in the year. While there are clearly some restrictions placed on an employee's access to the funds placed in a research account in the situation described by you (the funds may only be used by the professor in accordance with rules and policies made by the university and a professor is a "senior adviser" as regards withdrawals), we cannot offer a definitive opinion in this regard without a review of all terms and conditions surrounding this issue.

It is not clear that a transfer of property takes place in the situation described by you. A transfer necessarily implies that a person divest himself or herself of something and vest it in someone else (see Fasken Estate v. M.N.R., 49 D.T.C. 491). Ownership and control of the funds cannot be established on the basis of the limited information submitted. A review of all pertinent documentation would be required to make this determination.

It would have to be determined whether an employee is "otherwise entitled" to receive salary, wages or other remuneration, including gratuities, in the circumstances described. The terms of the collective agreement as cited above indicate that an employee may not be "otherwise entitled" but we would hesitate to draw a conclusion without a review of all pertinent documentation including the terms of the other options which an employee may choose. For the same reason, we would hesitate to opine on the possible application of subsection 56(4) of the Act.

You have stated that a fund is for "research or creative" purposes, which include research or creative activities intended for pedagogical development or service to the community. An amount, when received, would only be taxed as a research grant under paragraph 56(1)(o) of the Act if it meets the criteria for such as discussed in Interpretation Bulletin IT-75R3 (paragraphs 20-23).

Finally, to the extent that a research account is established mainly to postpone tax payable by an employee in respect of an amount that is, or is on account or in lieu of, salary or wages of the employee for services rendered, such account may be viewed as a "salary deferral arrangement" and any amount credited to that account for the benefit of the employee may be taxable under subsection 6(11) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch