Principal Issues: [TaxInterpretations translation] Is withholding required on research grants?
Position: No
Reasons: No withholding is required by virtue of the Act.
XXXXXXXXXX Alain Godin (613) 957-2745 2011-040974 June 24, 2011
Dear Sir:
Subject: Tax Deductions - Payments to a Scholar
This is in response to your email from May 11, 2011 to the Department of Finance and your emails and discussions with Alain Godin in which you described the following situation.
XXXXXXXXXX is a Chinese student who was a resident of the People's Republic of China before arriving in Quebec in XXXXXXXXXX. Since XXXXXXXXXX, that Chinese student has been working at your premises on the student’s a doctoral thesis. You stated that he came to this country for that reason. By a letter dated XXXXXXXXXX, a copy of which you provided, XXXXXXXXXX was awarded a $XXXXXXXXXX scholarship by your organization for the research project. The letter also states that XXXXXXXXXX will reimburse him for his travel and accommodation expenses. You indicated that you are paying him sums that you do not recognize as being a scholarship in the same way as for a Canadian student since he is not enrolled in a Canadian university. Consequently, in XXXXXXXXXX you withheld tax deductions totalling $XXXXXXXXXX. You brought to our attention Article 19 of the Agreement between the Government of Canada and the Government of the People's Republic of China (the "Agreement") which states:
Payments which a student, apprentice or business trainee who is, or was immediately before visiting a Contracting State, a resident of the other Contracting State and who is present in the first-mentioned Contracting State solely for the purpose of his education or training receives for the purpose of his maintenance, education or training shall not be taxed in that Contracting State.
You are asking us to confirm in writing that you do not have to deduct any tax at source respecting XXXXXXXXXX and wish confirmation that you can refund the tax he paid in XXXXXXXXXX so that he can be treated like other Canadian scholars (non-taxable scholarships).
The following legislative references are to the provisions of the Income Tax Act (RSC 1985, c.1 (5th Supp.), the "ITA"), or the Income Tax Regulations (CRC, 1978, c. 945; the "ITR"), as amended, in force as of the date hereof.
Comments
The situation described in your letter is an actual situation involving a taxpayer. As explained in Information Circular 70-6R5 issued May 17, 2002, the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") has the practice of not issuing a written opinion relating to proposed transactions otherwise than through advance income tax rulings. Where a situation involves a specific taxpayer and a transaction, you must forward all relevant facts and documents to the CRA's appropriate Tax Services Office for their opinion. We are, however, prepared to provide the following general comments, which we hope will be useful to you. These comments constitute technical interpretations that are not binding on the CRA and may, under certain circumstances, not apply to your particular situation.
A Canadian employer is required under paragraph 153(1)(a) of the Act to deduct at source from wages and benefits it provides to its employees However, a Canadian taxpayer who pays a scholarship or fellowship or a research grant to a student is not required to make tax deductions in respect of the amount of the scholarship; however, the person must complete an information return in respect of the payment in the form prescribed under subsection 200(2) of the Regulations. Note that research grants that are received by an individual are included in income pursuant to paragraph 56(1)(o) of the ITA. A scholarship awarded to a student to complete a research project leading to a Ph.D. and other amounts received by the student to cover the student’s maintenance and study expenses while working on their doctoral dissertation would normally qualify as a research grant within the meaning of paragraph 56(1)(o) of the ITA. A student who was, immediately before travelling to Canada, a resident of the People's Republic of China and who stays in Canada only to continue the student’s education or training would not be taxable in Canada on the money received to cover the student’s maintenance and education expenses pursuant to Article 19 of the above Convention and may claim a deduction pursuant to ITA subparagraph 110(1)(f)(i).
We hope that the above comments will be helpful.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch