11 August 2006 External T.I. 2006-0195781E5 F - Bourses de perfectionnement -- translation

Principal Issues: [TaxInterpretations translation] What is the tax treatment of a Natural Sciences and Engineering Research Council of Canada postdoctoral fellowship?

Position: Question of fact. In this case, the request for a technical interpretation does not appear to relate to a specific situation. Generally speaking, with respect to the Industrial Postdoctoral Fellowships mechanism, it is the Canada Revenue Agency's position that the amount of the fellowships must be taxed as employment income under subsection 5(1) of the Income Tax Act.

Reasons: The Income Tax Act.

XXXXXXXXXX 2006-019578

August 11, 2006

Dear Madam,

Subject: Technical Interpretation Application: Natural Sciences and Engineering Research Council of Canada Grant

This is further to your letter of August 18, 2005, and our reply of June 28, 2006, requesting certain information regarding the tax treatment of Natural Sciences and Engineering Research Council of Canada ("NSERC") fellowships. In response to your email of July 11, 2006, we are providing you with the following additional information.

Facts

The subject of your request for a technical interpretation is the tax treatment that can generally be attributed to NSERC fellowships. We will provide general comments on the taxation of fellowships in the context of an Industrial Research and Development Fellowship ("IRDF") holder working for a Canadian private sector organization for salary or wages. Thus, we ask that you exercise discretion in applying our comments to a particular situation.

We consulted the NSERC website (http://www.nserc-crsng.gc.ca) to understand the mechanism for NSERC scholarships and to establish the facts behind our technical interpretation:

• IRDF fellowships are worth $30,000 per year for two years, although payment in the second year of the award is conditional on meeting the eligibility criteria and pursuing the objectives of the program;
• The IRDF is paid directly to the host organizations, which use these funds to pay the graduates they hire;
• In order to participate in the IRDF program, host organizations must complete a formal application to NSERC and must meet a number of criteria;
• If a graduate is interested in applying for an IRDF, the graduate should contact a host organization that participates in the program and is willing to submit the graduate's application to NSERC;
• Before the graduate's application is forwarded to NSERC, the graduate must negotiate the details of the research project and the terms of employment with the host organization;
• In addition to the fellowship amount, a host organization must contribute at least $10,000 per year to the graduate's salary for the duration of the scholarship;
• The working conditions of an IRDF holder - including pay and leave - must be comparable to those of other employees in similar positions at the host organization;
• According to NSERC's "Award Holder's Guide 2006", the IRDF holder is an employee of the host organization where the individual conducts the research;
• The host organization may, at any time, terminate an IRDF fellowship due to the unsatisfactory performance of the grant holder;
• The host organization may offer the IRDF holder permanent employment at any time during the currency of the fellowship.

Analysis

Paragraph 56(1)(n) reads as follows:

56 (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

[…]

(n) the amount, if any, by which

(i) the total of all amounts (other than amounts described in paragraph 56(1)(q), amounts received in the course of business, and amounts received in respect of, in the course of or by virtue of an office or employment) received by the taxpayer in the year, each of which is an amount received by the taxpayer as or on account of a scholarship, fellowship or bursary, or a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer, other than a prescribed prize,

exceeds

(ii) the taxpayer’s scholarship exemption for the year computed under subsection (3);

Thus, an amount received pursuant to a fellowship - as is the case here - will fall within paragraph 56(1)(n) to the extent that the amount is not received – inter alia - by virtue of an office or employment.

An amount will be received by virtue of an office or employment if the relationship between the parties is one of employer-employee. The recent Supreme Court of Canada decision in Sagaz¹ and the Federal Court of Appeal decision in Wolf² have reformed the approach to determining whether an employer-employee relationship exists.

As a result of these judgments, the CRA has developed an approach to assess the overall relationship between the parties to determine the nature of the working relationship. Under this approach, a three-step process must be followed:

(1) At the outset, it is necessary to ask the following question: Is the person who has been engaged to provide the services providing them as a self-employed person or as an employee?

(2) Seven well-defined elements must then be analyzed. Those elements are as follows:

• The level of control the payer has over the worker's activities.
• Does the worker provide their own equipment?
• Can the worker subcontract the work or hire assistants?
• What level of financial risk does the worker assume?
• Does the worker have to assume a level of responsibility for investment and management?
• Does the worker have the opportunity to profit from the performance of the work?
• Any other relevant factors.

(3) In addition to the first two components, the CRA must also consider the intention of the parties.

Whether a relationship between two parties constitutes an employment relationship remains a question of fact that depends on an analysis of the circumstances of each case. In this case, the NSERC fellowship will be included in the recipient's income pursuant to paragraph 56(1)(n) only if the recipient of the fellowship is neither an employee of the host organization where he or she works nor an entrepreneur carrying on a business.

In this case, in light of the facts reproduced above and found on NSERC's website, it is quite possible that the NSERC fellowship recipient is employed by the host organization because of the relationship of subordination that appears to exist between the IRDF recipient and the host organization.

In the event that an IRDF holder is employed by a host organization, amounts received by the fellowship holder - including any amounts paid under an NSERC fellowship - should be included in the fellowship holder's income pursuant to subsection 5(1).

In any particular situation, and before an IRDF holder begins research work at a host organization, we believe that the parties should agree on the nature of their professional relationship. In the event that the parties cannot agree on the nature of such a relationship, the CRA may review the situation and provide an opinion on the matter.

We hope that this information is of assistance.

Best regards,

Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate

ENDNOTES

¹ [2001] 2 S.C.R. 983
² [2002] 4 F.C. 396 (F.C.A.)