Accounting Guidelines for Research Grants and Contracts
Research funding comes from a variety of sources. Both the University and the individual grant holder must adhere to internal and external rules and regulations in the administration of research funds. Granting agencies, as well as Revenue Canada, impose these rules and regulations. Failure to comply with these requirements could expose the researcher and the University to income tax liability or penalties or to a request for the return of funds.
Sources of Research Funding
Research funding is obtained through grants or contracts. The difference between a grant and contract relates to the nature of the research work, and the conditions under which that work is performed. Information differentiating between a research grant and contract can be found on the main page of the Research Finance section.
The University will administer funds only for research grants or contracts that have been reviewed and approved by the Research Office prior to final submission to the external agency. These applications must include a line-by-line budget for the funds requested or negotiated. A contractual agreement must be signed by the appropriate signing authority on behalf of the University (the Vice-President: Research) and by a representative of the external organization.
Tax Regulations Relating To Research Funding
The Research Office assigns control accounts (provided by the Accounting department) for internally-funded research grants. Control accounts for research funds provided by external sources are assigned directly by the Accounting department. Only eligible research grant and contract funding, with a final detailed line-by-line budget, will be assigned a research control account.
Revenue Canada Interpretation Bulletin IT-75R4, specifically sections 20 to 23, provides information for evaluating the tax status of research funding. Generally, funds credited to research control accounts administered by the University are not subject to income tax treatment. Subsection 56(2) of the Income Tax Act specifies that directed payments are deemed to be received by the individual, and must be included in taxable income, if the following four conditions (as stated in IT-335R) are met:
(a) there is a payment or transfer of property to a person other than the taxpayer;
(b) the payment or transfer is pursuant to the direction of or with the concurrence of the taxpayer (this may be implicit);
(c) there is a benefit to the taxpayer or a benefit the taxpayer wishes to confer on the other person;
(d) the taxpayer would have been taxable on the amount under some other section of the Act if it had been paid to the taxpayer.
Funding credited to research control accounts is not subject to income tax provided that only valid research costs are applied against the funding. If any costs incurred are considered to bring a "personal benefit" to an individual, then that amount can be considered to be income for tax purposes according to subsection 56(1)(o) of the Income Tax Act. Hence, only valid expenses can be charged against research projects. Sections 30 to 35 of Interpretation Bulletin IT-75R4, Award Guides issued by granting agencies such as NSERC and SSHRC, and A Guide To Research Funding provide information on the types of allowable research expenses.
Only funding obtained through University-administered research grants and contracts can be used to finance equipment purchased for the research project. Personal funds should not be used to finance any part of the cost of research equipment, if it draws into question the ownership and tax status of the equipment purchased. Thus, where the equipment purchased with personal funds is not a separate identifiable piece, but rather a component of a larger item, the equipment will become the property of the University. Capital expenditures for equipment such as computers or peripherals may be charged to a research account. To ensure that these expenditures qualify for tax purposes as valid research costs, this equipment must be considered as University property and accordingly tagged and recorded in the University's Asset Management System. Also, purchases of other tangible goods such as books or computer software must also be recorded as property of the University.
If a fund transfer to research control accounts is requested, such a transfer must be approved by the Accounting department based upon appropriately detailed and approved correspondence. The Accounting department will evaluate the nature and reason for the funding transfer prior to approving the transfer.
Fund transfers will be made by journal entry using Account 730936 - Miscellaneous Transfers. The use of this account will reflect that the entry is a transfer of funds from one department to another. Other accounts, particularly those in the salary and wage account range, must not be used in transferring funds from one department to another.
The following are some examples of valid types of funding transfers to research accounts:
1. Transfer of funds received from outside the University that were initially credited to a central control account prior to the assignment of a research control account number. The distribution of funds is based on correspondence received from outside granting agencies.
2. Transfer of funds relating to research work funded internally by the University. This type of fund transfer is based on correspondence received from the Office of the Vice-President: Research.
All funding transfer requests will be evaluated to ensure compliance with income tax regulations. In general, the fund transfer must not relate to employment income owing to an individual.
Approved by: Acting Vice-President: Finance and Administration, July 1994