23 June 1998 External T.I. 9814235 - TAXATION OF HONORARIUMS

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 honorarium payments are taxable?

Position: Yes.

Reasons: Honorarium payments are taxable as either employment income under section 5 or business income under section 9. Whether the honoraria payments is considered income from an office, employment or business is a question of fact.

		5-981423
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953

June 23, 1998

Dear XXXXXXXXXX:

Re: Taxation of Honorariums

This is in reply to your correspondence of May 29, 1998, concerning the taxation of certain payments received by an individual.

You describe a situation in which an organization is paying its Treasurer an honoraria of $400 per month for bookkeeping services. It is your opinion that these payments represent a salary and should be taxed accordingly.

Our comments

Since the term "honoraria" is not defined in the Income Tax Act (the "Act"), one must look to the meaning of this word as it is defined. Honorarium is defined in the tenth edition of Webster's Collegiate Dictionary as a payment for a service. The taxation of the honorarium is dependent on whether the payment is considered income from an office, employment or business. If the payment is considered business income, it is included in income under section 9 of the Act. Payments which are considered to be income from an office or employment, are included in income pursuant to subsection 5(1) of the Act.

The payments received by the Treasurer in your situation, are taxable under either section 9 or section 5 of the Act. You have not provided us with enough detail to determine whether the Treasurer is receiving income from employment or business, however we have provided you with the following comments which may be of some assistance to you in making such a determination.

The determination of whether a person performing services is an employee (earning employment income) or self-employed (earning business income) is primarily based on the facts and circumstances surrounding the work that the individual performs. Paragraph 19 of Interpretation Bulletin IT-73R5 provides a list of factors which are indications of employee status. A copy of IT-73R5 is enclosed for your files. Furthermore, several tests developed by the courts can be used to determine whether the performer of services is an employee or self-employed. These tests are:

a) Test of Control:

The objective of this test is to assess if the individual is limited or restricted under a master-servant relationship. It recognizes that in most cases, the degree of control of an employer over his employee is greater than that which is exercised in an independent contractor relationship. For instance, in a master-servant relationship, the master can order or require not only what is to be done, but how and when it shall be done. In contrast, an independent contractor is usually allowed to choose the manner in which the services are performed.

b) Integration Test

This test acknowledges that work performed by an employee under an employment contract is done as an integral part of the business, whereas under a contract for services, his work, although done for the business, is not integrated into it, but is only accessory to it.

c) Economic Reality Test

This test assesses the economic aspects of the relationship between the parties to determine whether the taxpayer is carrying on business for himself or for someone else. The objective of this test is to verify the existence of various factors of an economic nature, and, using these facts, attempt to assess the nature of the relationship. Factors to be considered in applying this test include the required investments to be made by the individual, permanency of the relationship, and the skill required by the individual.

d) Specified results Test

This test acknowledges that an independent contractor relationship usually involves the undertaking of a specific task after which the relationship ceases. Also it usually does not require that the undertaking be carried out by a particular individual. In contrast, in an employer - employee relationship, the employee makes himself available to the employer to be used by the employer without reference to a specified result.

Not all of the foregoing tests will be relevant in all cases or have the same degree of importance in all cases and no single test will in all circumstances be viewed as conclusive. However, cases to date have in most instances indicated that the most important distinguishing factor is the nature of control exercised by the employer over the employee. It is necessary to review and analyze carefully the facts of the particular situation to which the above tests are to be applied, and determine whether the relationship is either one of a contract of services or a contract for services.

If an employer-employee relationship is determined to exist, the employer is responsible for deducting income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums from the amounts paid to employees. If a corporation fails to deduct, withhold, or remit amounts (CPP, EI or tax), the directors of the corporation (at the time the corporation had to do this) are liable with the corporation to pay the amount due. This amount would include interest and penalties.

We trust our comments will be of assistance to you.

Roberta Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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