Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether a corporation which is not licensed to sell mutual funds may report commissions on sales of mutual funds by an employee who is a controlling shareholder.
Position: No.
Reasons: As stated in paragraph 2 of IT-189R2, if the provincial law or regulatory body for a particular profession precludes the practice of the profession by a corporation, income derived from the profession will normally be considered to be earned by the individual who rendered such professional services and not by a corporation. Thus, subsection 56(4) will apply to tax the commissions on the sale of mutual funds in the hands of the employee.
January 23, 2001
XXXXXXXXXX Tax Services Office HEADQUARTERS
Small & Medium Business Audit J. Gibbons, CGA
(613) 957-2135
Attention: XXXXXXXXXX
2000-006248
XXXXXXXXXX (the "Taxpayer")
We are replying to your memorandum dated December 18, 2000, in which you requested our views concerning the income tax treatment of commissions on the sale of mutual funds by the Taxpayer. These commissions were reported by XXXXXXXXXX (the "Corporation"), a corporation controlled by the Taxpayer.
Facts
1. The Corporation is a franchisee of XXXXXXXXXX.
2. The Corporation carries on business under the operating name "XXXXXXXXXX".
3. The Corporation carries on business from an office located in XXXXXXXXXX.
4. The Corporation is in the business of selling mutual funds, GIC's, life income funds, and disability insurance through the services of approximately XXXXXXXXXX sales representatives.
5. The Taxpayer and XXXXXXXXXX ("Holdco") are the controlling shareholders of the Corporation.
6. The Taxpayer is licensed by the Ontario Securities Commission to sell mutual funds.
7. All commissions earned by the Taxpayer were paid by XXXXXXXXXX to the Corporation and reported by it for income tax purposes.
8. All commissions earned by the other sales representatives were reported by the individuals.
At issue is whether the Taxpayer, rather than the Corporation, should have reported the commissions on the Taxpayer's sales of mutual funds. Presumably, you have accepted that the Corporation may report the income from the Taxpayer's sales of GIC's, life income funds, and disability insurance.
Taxpayer's position
The Taxpayer's representatives have stated that, while the business carried on and the reporting of the mutual fund sales commissions by the Corporation may contravene the regulations of the Ontario Securities Commission (the "OSC"), the income was nevertheless reported by the Corporation and the CCRA has always taken the position that illegal income is taxable. In their support, they refer to the income tax cases M.N.R. v. Olva Diana Eldridge (64 DTC 5338) and 65302 British Columbia Ltd. v. The Queen (99 DTC 5799).
Your position
It is your position that the commissions earned on the sale of mutual funds should be taxed in the hands of the Taxpayer by virtue of subsection 56(4) of the Income Tax Act (the "Act"). In this regard, you indicated that, since the licensing of mutual fund salespersons in Ontario is currently restricted to individuals, until such time as the OSC allows the sale of mutual funds to be made by a registered/licensed corporation, the selling of mutual funds must be considered the Taxpayer's business. Thus, the commissions are XXXXXXXXXX income pursuant to subsection 9(1) of the Act. In support of your conclusion, you referred to several opinions issued by our Directorate that clearly establishes this position.
Our position
It is always a question of fact to be determined on a case-by-case basis whether a business is being carried on by a corporation through individuals or by the individuals themselves. As stated in paragraph 2 of IT-189R2, if the provincial law or regulatory body for a particular profession precludes the practice of the profession by a corporation, income derived from the profession will normally be considered to be earned by the individual who rendered such professional services and not by a corporation. We have expressed this position in a number of letters, some of which you have referred to in your memorandum. In fact, in an opinion dated October 27, 2000 (E2000-0047657), we addressed the situation of mutual fund salespersons. In that letter, we concluded that the commission income assigned to a corporation should be included in the income of the individual mutual fund salespersons. Our position on this has not changed. Therefore, we agree with you that subsection 56(4) would apply to tax the mutual fund commissions in the hands of the Taxpayer in the particular case at hand.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. You may request this latter version by contacting Jackie Page at 613 957-0682, who will send the severed copy to you for delivery to the client.
John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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