http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/66884/index.do 
Kandasamy et al. v. The Queen[1] (February 17, 2014)
The position of medical residents has long been a confusing one for income tax purposes, largely because they share many of the characteristics of full-time students as well as those of full-time employees. In a decision that seems to have been designed to break this jurisprudential logjam the Tax Court in
Kandasamy concluded that medical residents were in law both full-time students and full-time employees. As full-time students they were entitled to the education tax credits and textbook tax credits that CRA had sought to deny them in these appeals (heard on common evidence).
[1] After receiving the degree of Doctor of Medicine (“M.D.”) from a university the individual who wishes to practice medicine in Ontario is required to register in a post-graduate program to qualify for a license to practice medicine in Ontario. The post-graduate medical residency programs are administered through Faculties or Schools of Medicine at Canadian universities in conjunction with hospitals, referred to as teaching hospitals, affiliated with the university. The individual, identified as a “resident”, pays a registration fee to the university but no tuition. The resident may follow the program from two to seven years depending on the medical specialty the resident wishes to undertake. The resident may work from anywhere from 50 to more hours a week for salary in a teaching hospital supervised by senior physicians who are appointed by the university. [This is referred to as the “clinical” portion of the program.] The programs also include from two to four hours of academic courses per month. The university issues to the resident the prescribed form known as “Tuition, Education and Textbook Amounts Certificate” (Form T2202A) for filing with the Minister of National Revenue (“Minister”).
[2] The nine appellants were registered in the medical residency programs in Ontario universities. Each appellant appeals from assessments in which the Minister denied their claims for the educational tax credit and textbook tax credit pursuant to Section 118.6 of the
Income Tax Act (“Act“) on the basis that each appellant was not enrolled in a “qualifying educational program” as a full‑time student at a “designated educational institution” as those terms are defined in Subsection 118.6(1) of the Act.
[Footnote omitted]
This case was at least the Crown’s second unsuccessful attempt to deny medical residents education and textbook tax credits:
[5] My colleague Justice Paris considered a similar appeal in
Pan et al v. The Queen in 2010. A number of residents appealed from assessments denying them the education tax credit and they were successful. In Pan, the Crown’s position was that the residents were not enrolled in a qualifying educational program because they derived a benefit by receiving instruction at no charge. Justice Paris held that in the context of Subsection 118.6(1) “benefit” is intended by Parliament to mean an economic or material benefit that can be measured in monetary terms rather than an intangible advantage. A free education offered by the university involved no monetary benefit to the residents.
[6] In these appeals the Crown took a different position in denying the claims for the education tax credit. The Minister’s position, among other things, is that the program is carried on by a hospital, not a university, that the residents spend less than ten hours a week on courses and are not full‑time students at a university.
[Footnote omitted]
The court summarized the Crown’s position as follows:
[37] To reiterate the Crown’s position:
a) each of the appellants spends less than ten hours a week on courses in a program within the meaning of “qualifying educational program” as defined in Subsection 118.6(1) of the Act;
b) none of the appellants are “full‑time student”, let alone a student and therefore they do not qualify for and may not deduct an amount as an education tax credit described in Subsection 118.6(2) of the Act; and
c) No appellant is enrolled in a qualifying educational program as a full‑time student at a designated educational institution.
The Crown placed considerable weight on a 2011 decision of the Supreme Court of the United States:
[43] The Crown cited the decision of
Mayo Foundation for Medical Education and Research et al. v. United States. In this case, the Mayo Foundation asked the Supreme Court of the United States to find that the Treasury Department of the United States did not have the authority to promulgate a rule that medical residents were required to pay a social security tax. The Supreme Court confirmed the decision of the U.S. Court of Appeals for the Eight Circuit. The Internal Revenue Code does not define “student” or address medical residents. The Court held that focusing on hours worked and hours spent in studies reasonably distinguished between workers who studied and students who worked: employees working long enough hours to be considered full‑time filled the conventional measure of available time with work. The rule did not distinguish between classroom education and clinical training. It was held that residents — who worked long hours, were highly skilled, and typically shared some or all of the terms of employment of career employees — were the kind of workers Congress intended to contribute to and benefit from the Social Security Act.
[44] The U.S. Court of Appeal held that the Treasury Department had authority to make the rule.
[Footnotes omitted]
The court rejected the application of the
Mayo Foundation case as well as an earlier decision of the Tax Court,
Chabaud:
[48] Neither the
Mayo Foundation case nor the
Chabaud appeal is helpful. Both cases held that the subjects of the appeals were employees. In the
Mayo Foundation, the U.S. Court had to find if the residents were either employees or students, they could not be both under the social security legislation. This is not the situation before me. In
Chabaud, this Court held that Dr. Chabaud, who was not taking courses in a qualified educational program, but performing research, was an employee. In the case at bar the appellants do not contest that they are employees. Ms. Trowell described the residents as having a dual status, as students and employees.
The court accepted the argument of counsel for the appellants that they were both students and employees:
[53] The faculties and schools of medicine of the universities are responsible for the resident programs. The potential resident applies to the university for acceptance to the university’s post-graduate study program. The decision to accept or reject the application is that of the university. There is no tuition fee charged to the residents but the Government of Ontario considers them as full‑time students in allocating financial grants to the universities. The teachers are doctors appointed by the university to various professorial ranks. The university considers the residents as full‑time students. The university determines whether a resident may advance to the next level in the resident program. The university may discipline a resident and the university’s decision is binding on the hospital. It is true that the clinical portion of the program takes place at the hospital − and the clinical portion is the overwhelming portion of the program − but it is carried on under the umbrella and tutelage of the university.
[54] I do not find it illogical in reading Subsection 118(6) that a person can be both a full‑time student and a full‑time employee or even carry on his or her own business on a full‑time basis while a full‑time student. It is not the average person’s preference but it is not an infrequent choice that many people, both residents and others, are compelled to make.
[55] The definition of “qualifying educational program” refers to a student taking the program and spending not less than ten hours a week “on courses or work” in the program. The word “or” in the phrase “course or work” in the definition of “qualifying educational program” in Subsection 118.6(1) of the Act must be conjunctive. The word “or” permits an individual to follow a qualifying educational program that is wholly made up of academic courses or one that is wholly made up of work. The phrase also allows an individual to follow a qualifying educational program that is made up of both academic courses and work, which is the situation at bar. And because one is being paid for one’s labour does not disqualify him or her from being a student. We are not in the age of indentured service.
[56] Subparagraph 118.6(a)(ii) of the Act defines a “designated educational institution” to include an institution certified by the Minister of Human Resources and Skills Development that furnishes a person with skills for, or improve a person’s skills, in an occupation. Hence, Parliament has contemplated situations where individuals undertaking an occupation that is not university oriented to undertake a program of study to learn the skills required for that occupation. The program of study may comprise both courses and work. In other words, these individuals work at their occupation at the same time as they take courses to learn or improve their skills for their jobs. These individuals who spend at least ten hours on work or courses at a designated educational institution for not less than three consecutive weeks may be eligible for the education tax credit.
[57] The same applies to residents. I cannot agree that they are not eligible for an education tax credit if they qualify under Subparagraph 118.6(1)(a)(i), Subsection 118.6(2) and are enrolled as full‑time student. …
Ironically, the Crown argued that such a decision would be unfair to students of law and chartered accountancy. The court gave short shrift to that argument:
… Respondent’s counsel startled me when he suggested that it would not be reasonable or fair to articling students seeking to qualify for the Bar or accounting students who want to become Chartered Professional Accountants if I allowed residents to claim the education tax credit and not them. As I understand it, the courses offered to articling and accounting students in Ontario are not offered by a designated educational institution and this may be one reason they would not qualify. Taxpayers often complain of the unfairness of the Act and often their complaint is well founded. However, this is the first time in my 30 years as a judge that I heard the Crown suggest that it may be prejudiced because the Act may not be fair.
In the result, the appeals were allowed with party and party costs.
Comment: The decision of the Chief Justice in Kandasamy is a triumph of common sense over formalism. While the issue of medical residents has been working its way through the Canadian income tax system for years, the elephant in the room has been that anyone with any knowledge of the medical education system knows that it is perfectly clear that residents are full-time students. It is also perfectly clear that most could not complete their medical education if they were not paid for their time as residents. In order to preserve the quality and international reputation of Canadian medical education it is necessary to apply taxation principles with both balance and fairness. One hopes that CRA will accept this decision graciously. If not, in the view of this writer, a CRA appeal to the Federal Court of Appeal will almost certainly be unsuccessful.
[1] 2014 TCC 47.