3/8/2016

Taxation of Post-Doctoral Fellowship Income

Matthew Roman E-mail: [email protected]

Disclaimer

This material is for educational purposes only and is not a substitute for professional advice. As it deals with matters which have broad applicable, it is not possible to include all possible situations. For this reason, a particular fact situation should be reviewed by a qualified professional.

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Requirement to file

You must file a tax return if: • You are a Canadian “resident” and you owe tax • You were sent a demand to file by the Canada Revenue Agency (“CRA”) • You are a non-resident employed in Canada, carrying on business in Canada, or disposed of taxable Canadian property You may optionally file a tax return if: • You want to claim a refund of taxes withheld at source • You want to apply for social benefits (UCCB, sales tax credit, etc.) • You want to establish a carry-forward for certain tax credits (tuition, donations, etc.) 3

Residency

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Residency for income tax purposes is independent from immigration status

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Based on the establishment of significant residential ties including: – place of dwelling/home, location of spouse and dependents, location of personal property, social and economic ties, etc.

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Canadian residents are taxed on their world-wide income earned while a Canadian resident

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Only Canadian residents are eligible for social benefits 4

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Residency

• What type of resident are you? – Full-year resident (“Factual resident”) – Part-year P t resident id t • Established ties/residency part-way through the year • Taxable on world-wide income earned while resident – Deemed resident • No significant residential ties to Canada, but present in Canada >182 days in the calendar year – Non-resident • No significant residential ties to Canada, not present in Canada >182 days in the year • Taxed on employment and business income earned in Canada, as well as dispositions of taxable Canadian properties • Withholding taxes paid on most passive sources of income 5

Residency

• Possible to be an income tax resident in more than one y country • Income tax treaties between countries will have tie breaker rules to determine residency and to avoid or reduce double taxation • Foreign taxes paid on income outside of Canada may be eligible li ibl ffor a fforeign i ttax credit dit

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Province of Residence

• Generally, an individual is subject to provincial tax on his or her worldwide income from all sources if the individual is resident in a particular province on December 31 of the particular tax year. • Possible to be considered a resident of more than one province on December 31 – Generally select the province where residential ties are strongest to determine provincial tax payable

• Most provinces harmonized with federal tax return and administered by CRA • Quebec has separate filing requirements and is administered by Revenu Quebec

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Fellowships

• A fellowship generally refers to an amount paid or benefit given for the purpose of advancing a person’s person s education. • Similar to a scholarship or bursary, but with the distinction that a fellowship is generally awarded to a graduate student by a university, charity, or similar body for doctoral studies or post–doctoral work. • There is no income tax definition for “fellowship” or “fellow”

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Fellowships

• A post-doctoral fellow (PDF) refers to an individual who has recently obtained his or her Ph.D. and is engaged in advanced research activities at a university or at a facility f or laboratory connected with a university (“Academic Fellows”) – E.g. obtaining sufficient experience and research for a professor position at a university

• Also refers to an individual who has completed both the required academic and professional training in a particular field and who has been given a special grant to enable him or her to engage in specialized training or research (“Clinical Fellows”) – E.g. training for medical doctors in highly specialized clinics or hospitals

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Fellowships

• Taxation of PDF income can get complex due to the variety of ways that income can be characterized as • Characterization is fact specific and dependent on the nature of the relationship between payer and recipient

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Fellowships

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An amount paid to a PDF is generally characterized as one of the following: – Employment income (T4 slip) – Research grant (T4A slip) – Scholarship/bursary/fellowship income (T4A slip) – Combination

• Tax treatment for each characterization differs • The nature and characterization of the amount received must be determined on a case–by–case basis • Regardless of the characterization, the recipient is obligated to pay taxes on income unless otherwise exempt (e.g. under a tax treaty) • CRA has the authority to contest any characterization, and PDF bears the cost of any interest and penalties on reassessment 11

Fellowships

• At UofT PDFs are generally considered to have employee/employer relationship with university and thus earn employment income – This is consistent with recent CRA publications where PDFs are primarily considered to be in receipt of employment income – 2012 decision by Ontario Labour Relations Board concluded work performed by PDFs at UofT labs have the hallmarks of an employment relationship

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Employment Income

• CRA factors that indicate existence of employment relationship (non-exhaustive) – Intention of the parties – Payer’s ability to exercise control over worker (e.g. what research or clinical activities will be done and how they are conducted) – Payer assigns tasks to be done (e.g. rotations, on-call duties, teaching, resident coaching, etc.) – Payer determines and controls method and mount of pay – Payer provides benefits that are ordinarily provided to employees (RPPs, group accident, health and dental plans, etc.) – Payer provides vacation pay – Worker cannot subcontract work 13

Employment Income

• There are generally limited deductions available against employment income – Membership dues paid to CUPE 3902 are deductible (usually reported on T4 slip) – T2200 form required from employer for most other eligible expenses – Unit 5 collective agreement does not appear to reference T2200 requests • Employment tax credit available for up to $172 in tax savings

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Employment Income

• General requirements to deduct home office expenses g employment p y earnings: g against – Must obtain T2200 from employer – Office is required under contract of employment (can be an implicit requirement if tacitly understood by both parties) – Not reimbursed for expenses – Office must be used more than 50% of the time to carry out duties from employment OR the space is used exclusively and on a regular/continuous basis for meeting clients, customers, or other people in the course of employment duties 15

Other Deductions

• Other common deductions – Moving expenses – Child care – Spousal support payments – RRSP deductions • Each subject to specific rules and limitations beyond scope of this presentation • Consult CRA website or a qualified professional for guidance 16

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Tax credits

• Tax credits are reductions to taxes payable (not reductions to income) and generally have the same dollar for dollar savings regardless of a taxpayer’s taxpayer s marginal rate of tax (i (i.e. e high income and low income individuals get same savings) • Common tax credits (not exhaustive): – Basic personal amount – Spouse/equivalent to spouse – CPP/EI – Canada employment – Tuition – Donations – Medical expenses – Transit – Children’s fitness 17

Source Deductions

• Canada Pension Plan (CPP) is designed to help provide Canadians with income for their retirement – Highest 40 years of pensionable earnings between the ages of 18 and 65 are generally used to determine benefits

• Employment Insurance (EI) provides temporary financial assistance to unemployed Canadians who have lost their job through no fault of their own (also includes maternity leave) • Mandatory for employer to withhold income tax tax, CPP and EI on pensionable/insurable earnings of employees • Withholdings apply even to non-residents

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Source Deductions

• Tax withheld at source on your T4 income is applied against your balance owing at year end – CPP/EI eligible for tax credit

• Can increase or decrease tax withheld at source (not CPP/EI) by submitting federal and provincial TD1 forms (available on CRA website) to payroll department

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Non-resident PDFs

• Non-resident employees providing employment services in Canada are subject to the same withholding, remitting and reporting obligations as those for Canadian resident employees. • Withholding can be reduced or eliminated through tax treaties • Waiver application R102-R available on CRA website to waive from employment earnings (effective when application approved by CRA, not retroactive) 20

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Non-resident PDFs

• Although worldwide income is not taxable in Canada as nonresident, it is used to calculate certain non-refundable tax credits on Canadian tax return return. – If Canadian income is less than 90% of your worldwide income, entitlement to credits is reduced

• Non-residents, deemed residents, and part-year residents cannot file tax return electronically • No-residents can mail return to: Canada Re Revenue en e Agenc Agency International and Ottawa Tax Services Office Post Office Box 9769, Station T Ottawa ON K1G 3Y4 CANADA 21

Filing your return

• All taxes payable are due no later than April 30th • Tax returns are due April 30th – If self or spouse have business earnings, both have until June 15th to file but taxes still due April 30

• Late tax returns and payments are subject to interest and late-filing penalties – No interest or penalties if no taxes are payable – Special S i l fili filing requirements i t separate t ffrom ttax return t (e.g. T1135) still subject to penalties if filed late and no taxes owing

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Filing your return

• You must have a valid Canadian social insurance u be to file e a return etu number • Non-residents required to file or applying for reduced withholding tax must have valid Individual Tax Number • Tax forms and packages are available at Canada Post outlets, by mail when ordered online, and by download from the CRA website • All t-slips received (T4, T5, etc.) have instructions on the back to indicate where the amounts must be reported on the return 23

Filing your return

• You must have a valid Canadian social insurance number to file a return • Non-residents required to file or applying for reduced withholding tax must have valid Individual Tax Number • Tax forms and packages are available at Canada Post outlets, by mail when ordered online, and by download from the CRA website • All t-slips received (T4, T5, etc.) have instructions on the back to indicate where the amounts must be reported on the return 24

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Resources

• CRA Income tax folios: ` ` ` `

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S1-F1-C1, S1 F1 C1 M Medical di l E Expense T Tax C Credit dit S1-F2-C1: Education and Textbook Tax Credits S1-F2-C2, Tuition Tax Credit S1-F2-C3, Scholarships, Research Grants and Other Education Assistance S1-F3-C1, S1 F3 C1, Child Care Expense Deduction S5-F1-C1, Determining an Individual’s Residence Status S5-F2-C1, Foreign Tax Credit 25

Resources

• Ontario - 2015 General Income Tax and Benefit package – http://www.cra-arc.gc.ca/formspubs/t1gnrl/on-eng.html

• CRA general enquiries: 1-800-959-8281 • CRA certified free tax filing software – http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/netfileimpotnet/crtfdsftwr/menu-eng.html

• CRA “My Account” – http://www.cra-arc.gc.ca/myaccount/

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Resources for Non-Residents

• List of relevant schedules: – http://www.cra-arc.gc.ca/formspubs/t1gnrl/on-eng.html

• Guide to completing your return as non-resident: – http://www.cra-arc.gc.ca/E/pub/tg/t4058/t4058e.html#P256_29078

• Forms needed to determine your Canadian nonrefundable tax credits on Schedule 1: – http://www.cra-arc.gc.ca/E/pbg/tf/5013-sa/README.html htt // /E/ b /tf/5013 /README ht l – http://www.cra-arc.gc.ca/E/pbg/tf/5013-sb/README.html

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Questions?

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• Check out our corporate newsletter, The O ti i Optimizer, where h we publish bli h periodic i di income tax updates and planning tips • Next edition: March 22 coinciding with the release of the 2016 Federal Budget • www.sfgroup.ca 29

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