18 September 2001 Internal T.I. 2001-0069607 - ASSIGN. OF FELLOWSHIP INCOME

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:

Taxpayer is a medical resident at a hospital. Enrols in a post-graduate program at the university affiliated with the hospital. Employer agrees to continue paying taxpayer his full salary if the taxpayer provides funding to employer by way of obtaining fellowships. Taxpayer obtains two fellowships, which he assigns to his employer.

Are the fellowships and full salary taxable? If so, is a deduction under paragraph 8(1)(n) available?

Position:

All amounts likely taxable with no offsetting deduction for amounts paid to employer. Final determination has to be made with reference to all documentation.

Reasons:

Salary is taxable under paragraph 6(1)(a). The fellowships are taxable under paragraph 56(1)(n). No deduction is available under paragraph 8(1)(n) because the amount paid by the taxpayer to his employer is based on the amount of fellowships obtained, not a reimbursement in respect of a period throughout which the taxpayer performed the duties of the office or employment.

		September 18, 2001

	XXXXXXXXXX 	HEADQUARTERS
	XXXXXXXXXX  Tax Services Office 	Terry Young, CA
		952-1506

		2001-006960

Assignment of Fellowship Income

We are replying to your correspondence of February 9, 2001, concerning the taxation of salary and fellowship income, the latter of which was paid to the taxpayer's employer.

We also acknowledge our telephone conversations (XXXXXXXXXX/Young) of February 5 and September 5, 2001 and various conversations with XXXXXXXXXX (Young/XXXXXXXXXX) on March 19, May 29 and July 10, 2001.

According to the letter from XXXXXXXXXX, which you forwarded to us, the taxpayer, XXXXXXXXXX, was, and continues to be, a medical resident in the XXXXXXXXXX (the "Employer"). As part of the medical residency program, the taxpayer is also enrolled as a student at XXXXXXXXXX (the "University").

The taxpayer wished to enrol in the XXXXXXXXXX offered through the University. Under XXXXXXXXXX, which is expected to last at least two years, the taxpayer will spend at least XXXXXXXXXX% of his time performing research for the University. His remaining time will be spent performing his regular duties for his Employer. As part of the arrangement between the taxpayer and the Employer, the taxpayer will remain on staff in the Department of XXXXXXXXXX and collect his salary as set out in the contract with the XXXXXXXXXX In return, the taxpayer was required to obtain fellowships to pay for a portion of his salary and benefits. Although XXXXXXXXXX believed there may have been a minimum amount of funding that the taxpayer was required to obtain, he does not know what the amount may have been. The taxpayer's base salary in XXXXXXXXXX was $XXXXXXXXXX. It is our understanding that no documentation exists regarding this aspect of the arrangement.

The taxpayer obtained the following fellowships, which he signed over to the Department of XXXXXXXXXX:

• XXXXXXXXXX
• XXXXXXXXXX

Under the conditions of the fellowships, they must be awarded to individuals. In XXXXXXXXXX, the taxpayer drew down $XXXXXXXXXX on one of the fellowships, which was paid to the Employer.

The taxpayer has received a T4 slip for his salary and benefits in XXXXXXXXXX and a T4A for the fellowship income received in XXXXXXXXXX. In his letter, XXXXXXXXXX has asked us what is the required income tax treatment of these amounts. In XXXXXXXXXX view, to include the entire salary and fellowship amounts in the taxpayer's income would be unfair given that the taxpayer did not actually receive any of the fellowship income.

Our Comments

In order to make a proper determination of the income tax treatment of these amounts, we would need to see written documentation supporting the arrangement. Nonetheless, based on the information that has been provided to us, we will provide you with our views.

In our opinion, the salary and benefits and fellowship income received in XXXXXXXXXX are all fully taxable to the taxpayer. As the taxpayer continued to receive his full salary and benefits after he entered the XXXXXXXXXX , it is clear that these amounts would continue to be taxable under section 5 and paragraph 6(1)(a) of the Income Tax Act (the "Act").

Paragraph 10 of IT-75R3, Scholarships, Fellowships, Bursaries, Prizes, and Research Grants, states "Fellowships ... are amounts paid or benefits given to persons to enable them to advance their education." As such, the $XXXXXXXXXX in fellowship income is taxable under paragraph 56(1)(n).

With respect to the amounts paid to or assigned to the Employer, we do not have sufficient information to determine the nature of these amounts. If they constituted a repayment of salary to the Employer, a deduction under paragraph 8(1)(n) may be available. However, based on the information provided, it is our view that paragraph 8(1)(n) would not apply because the amounts would not have been made "for a period throughout which the taxpayer did not perform the duties of the office or employment".

In conclusion, based on the information we have been provided, it is our view that the amount of the taxpayer's employment income on the T4 and fellowship income on the T4A are taxable with no deduction available for the fellowship income assigned to the Employer. In order to be certain, however, we suggest that you review the documentation to determine whether the legal nature of the arrangement was to decrease the taxpayer's employment income by the amount of fellowship income received and paid to the Employer. If this were the case, then the taxpayer's employment income would be reduced accordingly.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. 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 your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Should you wish to send a severed copy to the client, you may obtain one by contacting Jackie Page at (613) 957-0682.

We trust that our comments will be of assistance.

John Oulton, CA
Manager, Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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