PERSONAL TAX TRAINING

RESEARCH GRANTS

Research grants are a vital source of funding for individuals conducting scientific, academic, or technical studies. These grants help cover project-related costs, such as travel, equipment, and salaries for research assistants. However, not all grants are tax-free, and the Canada Revenue Agency (CRA) has specific rules for how these funds should be reported and taxed.

1. What Are Research Grants?

A research grant is a financial award provided to enable individuals or organizations to carry out specific research projects. Common examples include grants from universities, research institutions, or government bodies like the Canada Council for the Arts. Grants may be partially or fully taxable, depending on the amount received and the allowable expenses incurred.

2. Tax Treatment of Research Grants

Under Section 56(1)(o) of the Income Tax Act, research grants must be included in the recipient's taxable income to the extent that they exceed eligible expenses. If the expenses match or exceed the total grant, no part of the grant will be taxable.

For example, if you receive a $10,000 grant and incur $8,000 in eligible expenses, only $2,000 is taxable. Conversely, if your expenses are $12,000, none of the grant will be taxable, but you cannot claim the excess expenses as deductions.

3. Eligible Research Expenses

To reduce the taxable portion of a research grant, you can deduct certain expenses directly related to your project. These include:

• Travel Costs: Airfare, train tickets, vehicle expenses, meals, and lodging for research-related travel.
• Materials and Supplies: Items such as chemicals, lab equipment, and stationery required for the project.
• Research Assistants: Salaries or stipends paid to assistants hired to support the research.
• Software and Technology: Costs of purchasing specialized software or hardware necessary for research activities.
• Conference Fees: Expenses for attending research conferences to present findings or gather data.

Note: Personal and living expenses, such as groceries or rent, are not deductible. Additionally, any expenses reimbursed by the grantor cannot be deducted.

4. Grants for Employees vs. Non-Employees

Research grants can be awarded to both employees and non-employees. The tax treatment depends on the recipient's relationship with the grantor:

• Non-Employees: Grants provided to independent researchers are taxed based on how the funds are used. Any portion used for personal benefit or not tied to research activities is taxable.
• Employees: If an employer provides a research grant, the CRA may classify it as employment income. This is common in cases where the grant supports the employee’s regular job duties, such as a university professor conducting research during a sabbatical.

5. Examples and Case Studies

• Example 1: A university professor receives a $15,000 grant for a research project. The professor incurs $10,000 in eligible expenses, including travel and equipment. The remaining $5,000 is taxable income.
• Example 2: A doctoral student receives a $20,000 grant but only spends $7,000 on eligible expenses. The $13,000 surplus must be reported as taxable income on their return.
• Case Study: In a notable tax case, the CRA ruled that funds used for personal living expenses during a sabbatical are taxable as employment income. However, research-related expenses were deductible, reducing the taxable portion of the grant.

6. Reporting Requirements

When filing your tax return, report the total research grant amount on line 10400 ("Other Employment Income"). Subtract eligible expenses to determine the taxable portion. Maintain detailed records, including receipts, invoices, and contracts, as the CRA may request these for verification.

7. Administrative Guidelines

The CRA assesses the purpose of a research grant based on its terms. Grants must explicitly support research activities to qualify under Section 56(1)(o). Ambiguous language, such as "including research," does not automatically exempt the grant from taxation.