CUPE Local 3902 Information
Seminar
Taxation of Post-doctoral Fellowship
Income
April 5, 2013
Roberto Tomassini, Partner
Phone: 416-595-2116
E-mail: rtomassini@kmlaw.ca
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
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employment relationship
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 nonresidents 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
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for the education tax credit
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
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compensation for work or student assistance
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 profit
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Determining Factors and PDFs
Canadian 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
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employment
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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