ARCHIVED - Canada Council Grants
DATE: March 31, 1995
SUBJECT: INCOME TAX ACT
Canada Council Grants
REFERENCE: Paragraph 56(1)(n) (also subsections 5(1) and 9(1), paragraphs 8(1)(p) and (q) and 56(1)(o) of the Income Tax Act and section 7700 of the Income Tax Regulations
This bulletin cancels and replaces Interpretation Bulletin IT-257, dated October 20, 1975 and the Special Release dated March 21, 1986.
This bulletin deals with the tax treatment of grants and other payments from the Canada Council. The bulletin indicates how and when such amounts are included in income as business or employment income or as taxable grants, fellowships or prizes. The bulletin explains the deductibility of expenses related to grants for the production of artistic works. It also discusses non-taxable prescribed prizes.
Discussion and Interpretation
1. The Canada Council and its subsidiary agencies ("the Council") offer various types of assistance, primarily grants, prizes and other assistance for the promotion of the arts, as well as some fellowships in the humanities and social sciences. This bulletin sets out general principles to be applied when considering the taxability of these amounts.
2. Depending on the nature of the assistance, the status of the recipient, and the arrangements or circumstances under which the assistance is provided, the amount received may be included in the recipient's income as:
(a) income from business (see 3 below);
(b) income from an office or employment (see 4 below);
(c) a scholarship, fellowship, bursary, prize or research grants (see 7 and 8 below), including a grant for the production of an artistic work (see 5 and 6 below).
Income from Business
3. When a taxpayer receives the assistance in the course of operating a business or practising a profession, the amount is included in the calculation of income or loss under section 9. Examples of such assistance are Grants in Aid of Publication and Translation to the publishing industry, and project grants (other than education grants) to self-employed artists. In addition, payments made for the purchase of works of art from a self-employed artist under the Art Bank program of the Council are not grants but are considered to be ordinary business income to the artist; accordingly, such payments are included in the income or loss under section 9. The current versions of IT-504, Visual Artists and Writers, and IT-525, Performing Artists, discuss factors that identify a self-employed artist earning business income.
When a grant for the production of a literary, dramatic, musical or artistic work does not constitute business income, it may qualify for the special treatment outlined in paragraphs 5 and 6 below.
Income from Employment
4. When a taxpayer receives an amount by virtue of or in connection with an office or employment, it is considered employment income under subsection 5(1). It is immaterial that the funds from which the remuneration is paid were obtained under Council assistance or from some other source. For example, a university professor may have been employed on the strength of a Council grant awarded to the university specifically for the purpose of engaging his or her services. In that situation, the professor's remuneration would be subject to tax as employment income under subsection 5(1). In another case when, for instance, an artist is selected by the Council for training or development through an arrangement under which the artist is placed under an employer for a small salary or no salary while the Council subsidizes the artist's employment income, the assistance from the Council to the artist, whether paid directly or through the employer, is considered to be received by virtue of the employment, and is therefore taxable in the artist's hands as income from employment. (Please refer to the current version of IT-525, for guidance in determining whether or not an artist is an employee or self-employed.) Paragraph 8(1)(p), applicable to the 1988 and subsequent taxation years, and paragraph 8(1)(q), applicable to amounts paid after 1990, allow a limited deduction of expenses paid for the purpose of earning employment income from certain musical and other artistic activities.
Art Production Grants
5. When an artist receives a project grant (referred to in this bulletin as an "art production grant") that is neither business nor employment income, the grant is included in the artist's income under paragraph 56(1)(n), but special rules apply. Specifically, an exception to the flat $500 exemption mentioned in 8 below applies if an artist receives an amount that is included in income under paragraph 56(1)(n) and that amount is to be used by the artist in the production of a literary, dramatic, musical or artistic work. In such cases, when calculating income from an art production grant under paragraph 56(1)(n), the taxpayer may deduct whichever of the following amounts is greater:
(a) $500 and
(b) the total amount of reasonable expenses incurred to fulfil the conditions of receiving the art production grant, but not exceeding the total amount of the grant included in income for the year under paragraph 56(1)(n).
The amount in (b) above does not include:
(c) personal or living expenses of the taxpayer (other than expenses for travel, meals and lodging incurred in the course of fulfilling the conditions of the grant and while absent from the taxpayer's usual place of residence for the period to which the grant relates). The taxpayer may not claim the travelling expenses of his or her spouse and children or other third parties,
(d) expenses for which the taxpayer has been reimbursed, and
(e) expenses that are otherwise deductible in computing the taxpayer's income.
In this context, the term "expenses" includes not only current expenses, but also expenses of a capital nature.
6. Subparagraph 56(1)(n)(iii) provides that eligible expenses must be incurred in the same year in which the art production grant is received in order to be deductible from the grant. In some cases, expenses related to the production of the artistic work may be incurred in the year immediately before or immediately after the year in which the grant is received. While those expenses are not deductible in the year in which they are incurred, they will be allowed as deductions in the year in which the grant is received. However, expenses incurred in the year immediately before the grant is received are only deductible from the grant if they are incurred after the artist has received notification that the grant will be paid. Expenses incurred more than one year before, or more than one year after, the year in which the grant is received are not deductible from that grant. For example, if notification of a grant is received in September of one year, but the grant is not received until February of the following year, production expenses incurred during the last three months of the first year will be allowed as deductions from the grant in the second year when it is received and included in income.
Scholarships, Fellowships, and Research Grants
7. Various grants, fellowships, awards and scholarships are provided by the Council. In each case, the facts must be examined in order to determine whether the assistance is included in income as a scholarship, fellowship, bursary or taxable prize under paragraph 56(1)(n) as described in 8 below, or whether it is a research grant included in income under paragraph 56(1)(o), after deducting allowable expenses. However, as discussed in 9 below, an award from the Council is not included in income if it qualifies as a "prescribed prize." The current version of IT-75, Scholarships, Fellowships, Bursaries, Prizes and Research Grants, discusses the differences between these types of amounts, as well as the manner in which they are taxed under various circumstances.
8. Subject to the qualifications explained below, paragraph 56(1)(n) includes in income all but the first $500 of amounts received in the year as or on account of a scholarship, fellowship or bursary. Paragraph 56(1)(n) similarly includes in income all but the first $500 of a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer (other than a prescribed prize - see 9 below). Paragraph 56(1)(n) and the $500 exemption above do not apply to amounts received in the course of business or to amounts received in respect of, in the course of, or by virtue of an office or employment. As explained in 5 above, different treatment may apply to grants for the production of literary, dramatic, musical or artistic works.
9. A prize meeting all of the criteria of a prescribed prize is not included in computing the income of the recipient, even if the prize relates to accomplishments in the recipient's ordinary field of endeavour. Section 7700 of the Regulations defines a prescribed prize as "any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public but does not include any amount that can reasonably be regarded as having been received as compensation for services rendered or to be rendered." Certain prizes awarded by the Council qualify as prescribed prizes, for example, the Governor General's Literary Awards. However, other Council awards and prizes, such as the Joseph S. Stauffer Prize are only given to individuals who have successfully qualified to receive a Council grant. In such circumstances, these awards or prizes simply replace the grant that was otherwise payable and the recipients are still required to carry out their projects in accordance with the terms set out in their grant application. Such awards or prizes do not qualify as prescribed prizes.
10. Unless an award is a prescribed prize as described in section 7700 of the Regulations, the Council must file information returns under section 200 of the Regulations in respect of its grants and awards.
If you have any comments concerning the matters discussed in this bulletin, please send them to:
Director, Technical Publications Division
Policy and Legislation Branch
875 Heron Road
Ottawa ON KlA OL8
Explanation of Changes for Interpretation Bulletin IT-257R Canada Council Grants
The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.
IT-257R updates existing IT-257 and its March 21, 1986 Special Release, which deal with the tax treatment of grants and other assistance from the Canada Council. The current revision was undertaken to incorporate changes in law to paragraph 56(1)(n) and the addition of paragraph 8(1)(q) contained in S.C. 1994, C.7 Schedule 11 (1991 c.49-formerly Bill C-18); the addition of paragraph 8(1)(p), contained in S.C.1988, c.55 (formerly Bill C-139), as well as the introduction of tax-exempt "prescribed prizes", applicable to 1983 and following years, by section 7700 of the Regulations. General revisions have also been made to improve the readability of the bulletin and to reflect recent departmental interpretations.
Legislative and Other Changes
New No 1 replaces the introductory comments in former No 1 and reflects the Canada Council's mandate to provide grants to the arts and its lesser involvement with providing research fellowships in the humanities and social sciences.
New No 2 is a simplified version of former No 2. The details formerly found in this paragraph have been consolidated in later Nos.
New No 3 replaces the comments on business income found in former Nos 2(a) and 3. We have clarified that the assistance payments to a business or practicing professional form part of the computation of business income or loss under section 9.
Former No 4 has been deleted as the situation outlined there no longer occurs under any existing or contemplated Canada Council program.
New No 4 deals with the inclusion of assistance in income from employment and is substantially unchanged from former No 5. Reference has been added to the deductions under paragraphs 8(1)(p) and (q) for expenses laid out for the purpose of earning income from musical and certain other artistic activities.
New Nos 5 and 6 reflect the amendment to paragraph 56(1)(n). It allows expenses to be claimed against grant income received by artists in the form of what are here termed "art production grants." Applying a similar position from IT-75R3, new No 5 advises that travelling expenses of the artist's family or third parties are not allowable.
New No 6 discusses the deduction of expenses incurred in the immediately preceding or the immediately following taxation year. This position is consistent with comments in IT-75R3.
New No 7 on scholarships, fellowships, and research grants, is largely unchanged from former No 6.
New No 8 expands on and updates the comments on prizes found in former No 2(c).
New No 9 deals with tax-exempt prescribed prizes under section 7700 of the Regulations. Paragraph 56(1)(n) was amended in 1987 to refer to "prescribed prizes." It also provides an example of a prescribed prize.
New No 10 reflects the requirements for the Canada Council to file information returns pursuant to section 200 of the Regulations for most grants and awards.
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