CRA recently released a letter which discusses the proper tax treatment of a post-doctoral fellowship and a travel/conference allowance received from a trust administered by a registered charity.
CRA had the following comments:
An amount received by a post-doctoral fellow is generally characterized as employment income, a research grant or fellowship income. The determination of the character of the income will depend upon the primary purpose for which the amount was granted with reference to the terms and conditions attached to the amount and the nature of the relationship between the recipient and the grantor.
Where the particular facts and circumstances indicate that an employment relationship exists between the recipient and the grantor, an amount paid to an individual will be taxed as employment income under section 5 of the Act. Normally, when an employer-employee relationship exists, the employer expects work to be done, dictates how and when it should be done and remuneration is provided for such services. Paragraph 3.29 of Income Tax Folio S1-F2-C3, Scholarships, Research Grants and Other Education Assistance (Folio S1-F2-C3) lists some of the factors that might indicate the existence of an employment relationship.
Employment income must be reported by the payer on a T4, Statement of Remuneration Paid. The amount to be reported on the T4 is the amount that is received in a tax year by the individual.
Based on the information you have provided, it does not appear that the post-doctoral fellowship is employment income; therefore, it is most likely a research grant or fellowship income.
A research grant is generally a sum of money given to enable the recipient to pay expenses necessary to carry out a research project. The grant may also include an element of remuneration to the recipient. Research grants are included in income under paragraph 56(1)(o) of the Act to the extent that the grant exceeds allowable expenses incurred by the taxpayer in the year for the purpose of carrying on the work.
It is the nature and terms of the grant, rather than the name given to it, that determine whether it is taxed as a research grant or as fellowship income. If the primary purpose of the amount is to carry out research for its own sake (for example, to further knowledge in a particular field by discovering new facts, or by reinterpreting existing knowledge), the amount is considered to be a research grant. It may be that the recipient’s education and training is also furthered by such research, but such a factor does not alter the primary purpose of the grant (i.e., its character does not change), provided the educational or training benefit could be considered to be a secondary purpose of the grant or an inevitable but incidental benefit. Folio S1-F2-C3 provides additional information on research grants and allowable research expenses.
Amounts that are received in a tax year by an individual in respect of a research grant are reported in box 104 of a T4A, Statement of Pension, Retirement, Annuity and Other Income (T4A) by the payer of the grant.
Whereas the primary purpose of a research grant is research, if the primary purpose of an award is to further the personal education and training of the recipient, it may be fellowship income included under subparagraph 56(1)(n)(i) of the Act. As such, it is similar to a scholarship or bursary. However, this is more likely to apply when the individual, for example, is studying for a doctoral degree and is therefore still a student rather than an individual engaged in post-doctoral work.
Amounts received in a tax year by an individual in respect of fellowship income under subparagraph 56(1)(n)(i) of the Act are reported in box 105 of a T4A by the payer.
Paragraph 56(3)(a) of the Act applies to fully exempt an amount that would otherwise be included in an individual’s income under subparagraph 56(1)(n)(i) of the Act when the amount is received in connection with the individual’s enrolment as a student in an educational program that is eligible for the education tax credit. A post-doctoral fellow engaged in research activity is not eligible for the education tax credit. Therefore, the individual is not eligible for the full scholarship exemption and is limited to a maximum scholarship exemption of $500.
With respect to the travel/conference allowance, CRA also concluded that:
"If the reimbursement is only for bona fide research expenses, no amount needs to be reported on a T4A. If this determination cannot be made, the full amount should be reported on a T4A as a research grant. As noted, only the amount of the research grant that exceeds allowable expenses is included in income by the recipient."
Here is a copy of the full CRA letter.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.