CUPE Local 3902 Information Seminar

Roberto Tomassini, PartnerPhone: 416-595-2116E-mail: rtomassini@kmlaw.ca

Taxation of Post-doctoral Fellowship Income

April 5, 2013

Introduction

This seminar is intended to provide general information regarding the taxation of post-doctoral fellowship (“PDF”) income

Taxation is fact specific and turns on the terms of the relationship between the payor and the recipient and the characterization of the income at issue

Taxation of PDF income is complicated because of the variety of forms which a post-doctoral fellowship may take and the differential tax treatment of the type of payments received

Your taxation depends on the specific terms of your engagement and your personal circumstances - you should receive individual tax advice

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General Principles

Generally, income received by an individual (not a corporation) for services provided to a third party is taxed either as employment income or “business” income

Proper taxation is dependent on the legal relationship between the parties

The agreement of the parties regarding the nature of the relationship is not binding on the Canada Revenue Agency (CRA) or the Courts

The parties may state in an agreement that the relationship is not an employment arrangement – the CRA and the Courts will ignore this agreement if in fact under the general law the relationship is an employment relationship

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General Principles Cont’d Regardless of the tax characterization of the income the

recipient is obligated to pay taxes on income unless otherwise exempt

The Canadian income tax system is based on self assessment principle – all Canadian residents and non-residents who earn income in Canada - are required to report annually and pay taxes on their income

The CRA has the authority to reassess a return if they disagree with the return as filed

Taxable income of an individual (regardless of source/classification) is taxed at his/her marginal tax rate The blended tax rate for Ontario residents ranges from

20.05% for the first $39,723 of taxable income to 49.53% for income over $509,000

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Taxation of PDF Income Taxation of PDF income is more complicated:

“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 under paragraph 56(1)(n) [of the Income Tax Act, i.e. as a “scholarship, fellowship or bursary”]; in most cases, we would expect either section 5 (for employment income) or paragraph 56(1)(o) (for research grants) to apply.”

CRA Technical Interpretation 2009 – 0311901E5 – cited by the Ontario Labour Relations Board (2012) – employment status of U of T PDFs

“Staff, student or employee? The employment status of Canadian post-doctoral researchers remain unclear – many are struggling with the tax issues that arise from the ambiguity.”From Nature.com quoted in the Tax Court of Canada Decision – Chabaud v. The Queen 2012 DTC 1076

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Tax Character of PDF Payments

PDF payments may be characterized as: Scholarship, fellowship or bursary; Research grants; Employment income; or Business income (least likely)

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Scholarship, Fellowship or Bursary Income

Amounts paid or benefits given to persons to enable them to advance their education – “financial assistance”

If primary purpose of the payment is to further education and training such as studying for a doctoral degree, the payments are treated as fellowship or scholarship income under subparagraph 56(1)(n)(i)

Section 56(3)(c) provides an exemption from tax for scholarship, fellowship or bursary income: $500 exemption; Full exemption if payment intended to support

enrollment in an educational institution qualifying for the education tax credit

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The Full Scholarship Exemption - Do PDFs Qualify?

Some uncertainty prior to 2010 – CRA’s view is that the full exemption was never intended to apply to PDF income

ITA changes announced in the 2010 budget make clear that PDFs are generally not eligible for the full exemption

Exemption requirements: Must be entitled to the education tax credit (subsection

118.6(2) which requires that: The individual must be a student; and He/she must be enrolled in a “qualifying educational

program” at a “designated educational institution”; and The amount paid must be connected with educational

program for which the education tax credit is claimed To qualify for the full exemption the payments must be made

in connection with educational programs leading towards a diploma or degree – this disqualifies most PDF payments 8

Scholarship v. Employment Income Paragraph 56(1)(n) of the ITA relating to the taxation of

scholarship and bursaries expressly excludes amounts received by virtue of an office or employment

This requires a determination of the character of the payments - if employment income it does not qualify as scholarship income

The fundamental question which both the Courts and the CRA have grappled with is whether the payments under consideration provides financial assistance to further a recipient’s education or as compensation for work performed

Caropreso v. R. (2012) TCC – the difficulty is that payments to PDFs often have dual elements – the payments may further the education of the PDF but also provide compensation for work performed. If payments are received by virtue of employment, this takes precedence.

In making the determination the CRA and the Courts consider the dominant characteristic of the payments – whether it is compensation for work or student assistance

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Scholarship v. Employment Income – The Tax Court’s View

The Tax Court has issued a number of seemingly contradictory rulings relating to PDFs – most recent confirmed CRA’s view that PDF payments are employment income

Chabaud v. The Queen (2011) DTC 1076 (Informal Procedure) Caropreso v. R. 2012 CarswellNat 1925 (Informal Procedure)

In both cases the PDFs characterized income as scholarship, bursary or fellowship income and claimed the full exemption

They were reassessed – full amount of their remuneration was included in income and subject to tax plus interest

Tax Court acknowledged that the relationship included elements of education and training but that these elements were subsidiary to the employment relationship

Court determined that in essence PDFs were remunerated for services rendered, were subject to supervision and direction by their research professors who had ability to control the manner in which the PDFs performed their work

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Scholarship v. Employment Income – The Tax Court’s View Cont’d

In Chabaud, Tax Court specifically rejected the argument that the relationship between the research professor and the PDF was one of student and professor – a professor does not pay a student when the student studies, in fact the opposite is true – it is the student who pays tuition fees

the Court analogized PDFs to articling law student, medical resident, or accounting trainee, all of whom require more experience and training as part of their career advancement, but are paid remuneration for their work which is taxable as employment income

The Tax Court reached a different conclusion in Zhang v. R., 2010 CarswellNat 4326 (Informal Procedure), Huang v. R., 2012 CarswellNat 551 (Informal Procedure) Tax Court refused to hear the CRA’s argument that the PDF

income in Huang was employment income because raised too late – not even considered in the Zhang decision

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Canada Pension Plan and Employment Insurance Considerations

Several cases have found PDF’s remuneration not to be employment income for the purposes of EI and CPP Ontario Cancer Institute, 1993 CarswellNat 2659:

“…not an employment contract of service. It was a contract for education and training for an indefinite period of time”

Bekhor, 2005 CarswellNat 2052 “…the relationship…was one of advanced student and

professor, not one of employee and employer. The stipend received was in the nature of financial assistance provided to a learning postdoctoral fellow, not remuneration for services rendered by an employee to an employer.”

Naghash, 2005 CarswellNat 3651 The facts similar to those in Bekhor and the Tax Court adopted

the same conclusion – relationship was educator – trainee not employment

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Employment Income – Determining Factors Direction and control

Control is the ability, authority, or right of a payor to exercise control over a worker concerning the manner in which the work is done and what work will be done (i.e. hours of work, supervision, control the method and amount of pay)

Ownership of tools and equipment If the worker provides their own tools and equipment, this militates

against them being an employee Subcontracting work or hiring assistants

If the worker can subcontract their work to another person then not likely an employee

Financial risk Determine if there are any fixed costs incurred by the employee or

any expenses that will not be reimbursed Opportunity for profit

Can the worker realize a profit13

Determining Factors and PDFsCanadian Union Public Employees v. University of Toronto, 2012 CanLII 1673 (ONLRB)

In its decision the OLRB after applying a similar test referenced these determining factors and concluded:

“The fact is that the PDFs perform work in the University of Toronto’s labs, using the University’s equipment and materials, produce something of value, i.e. research, and receive compensation from the University for the performance of that work. These are all hallmarks of an employment relationship.”

The OLRB decision is not binding on the CRA or the Tax Court, but analysis is similar

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Determining Factors and PDFs - New CRA Policy

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: intention of the worker and the payer when they entered into the arrangement,

such as in a written agreement that indicates that the worker is an employee or an offer of employment;

the payer has the right to exercise control over the worker, such as what research or clinical activities will be done and how and when they will be conducted.

the payer assigns tasks to be done, such as rotations, on-call duties, teaching, resident coaching, etc.;

the payer determines and controls the method and amount of pay to the worker; the payer provides benefit plans which are normally provided to employees,

such as registered pension plans or group accident, health and dental insurance plans;

the payer provides paid vacation leave and other work-related paid leave; and the worker must perform the work, not subcontract the work or hire assistants.

CRA Income Tax Folio S1 – F2 – C3: Scholarships, Research Grants and other Education Assistance

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Research Grants v. Employment Income

Grants received in a taxation year to enable a taxpayer to carry on research or any similar work are included as income as research grants under paragraph 56(1)(o) of the ITA

What distinguishes the taxation of research grants is that the grants are only included to the extent that they exceed the total of the allowable expenses Expenses may include salary or wages paid to

assistants, cost of equipment and supplies, laboratory charges, travelling expenses for the purposes of carrying out the work – does not include personal living expenses

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Research Grants Cont’d

In order for a grant to be considered a “research grant”, the terms of the grant must establish that the primary purpose of the grant is to enable the recipient carry out “research”

For CRA’s purposes, “research” involves a critical or scientific inquiry aimed at the discovery of new facts, or the development of new interpretations or applications

Individuals whose duties of employment include research responsibilities are not entitled to treat a portion of their regular salaries as a research grant when they engage in the type of research work ordinarily expected of them under their terms of employment

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Tax of Non-resident PDFs General residency rules

Residents: subject to Canadian income tax on worldwide income from all sources

Non-residents: only subject to Canadian income tax on income from sources inside Canada

The term "resident" is not defined – you are non-resident for tax purposes if you:

Normally, customarily, routinely live in another country; or You do not have significant residential ties in Canada (a home,

spouse, property, social ties, bank accounts, driver’s license, health insurance); and

– You live outside of Canada throughout the year; or– You stay in Canada for less than 183 days in the year (deemed residency)

If you are a factual resident of Canada and another country you may be considered a non-resident of Canada for tax purposes under a tax treaty with your other country of residence

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Tax of Non-resident PDFs Cont’d There are special rules for non-resident individuals

who are students, carrying on research or previously a Canadian resident who received income from employment, fellowships and research grants

Non-resident deemed to be employed in Canada for purposes of determining non-resident income

Subparagraph 115(2)(e)(ii) requires non-resident income to be calculated as the amount that would be required to be included as either fellowship or grant income if the individual was a resident of Canada

Same rules apply to determine if income characterized as employment income, scholarship/fellowship income or research grant

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Summary PDF income may be taxed as scholarship, bursary or

fellowship, research grant, employment or business income If your engagement bears the hallmarks of employment

relationship the CRA and the Tax Court are likely to characterize payments received as taxable employment income

However, PDF engagement may not be treated as employment for CPP and the EI purposes

If income properly characterized as scholarship or fellowship, income is still taxable above $500 exemption – full exemption not available

Law is uncertain and you bear the cost (interest and penalties) if you are wrong

Get personal tax advice

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Questions?

For further information: www.cra-arc.gc.ca

CRA Income Tax Folio S1 – F2 – C3: Scholarships, Research Grants and other Education Assistance

New publication just released March 28, 2013 – CRA consulting until June 28, 2013

E-mail questions to postdocs@cupe3902.org

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