28 September 1998 GST/HST Interpretation HQR0000848 - Management Fees Received by Sole Director of His Own Corporation

Thank you for your memo of September 10, 1997, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to management fees received by a sole director of his own company. Please accept our apologies for the delay in the response.

Statement of Facts

1. XXXXX is the sole director of his own company called XXXXX[.]

2. XXXXX is registered for GST/HST.

3. XXXXX is hired by small and medium sized corporations to go in and reorganize the client's management and human resource functions. As well, XXXXX organizes the client's conferences.

4. XXXXX performs all the functions required to run XXXXX[.] His duties also include performing all the work required by the contracts entered into by XXXXX[.]

5. In XXXXX received payments, classified by him as "management fees", from I XXXXX reported these "management fees" on his T1 individual income tax return as "gross business income".

6. The "management fees" received by XXXXX exceeded the $30,000 small supplier threshold. Consequently, on XXXXX the Tax Services Office registered XXXXX for GST/HST with an effective date of January 1, 1991.

7. In XXXXX became a salaried individual of XXXXX and has received T4 slips since that time. The decision to claim the payments from XXXXX as T4 income rather than as "management fees" was made by XXXXX. Revenue Canada has not performed an audit on XXXXX payments.

Interpretation Requested

1. Is a sole director of his own corporation receiving payment from the corporation in the form of "management fees" required to register for GST/HST?

2. Are there some clear guidelines as to the registration requirements involving "management fees" received by a sole director of his own corporation?

3. Provide clarification to Q&A GST8a.24, currently found in the Excise Automated Reference Library ("EARL").

Interpretation Given

Answer to Request 1 and Request 2:

You have requested that our Division determine if a sole director of his own corporation receiving payment from the corporation in the form of "management fees" should be registered for GST/HST. Also, you have requested some clear guidelines as to the registration requirements involving "management fees' received by a sole director of his own corporation. In your request, the term "management fees" is used to describe the remuneration received by an individual, as a sole director, from a corporation that is controlled by the individual, for duties or activities performed for the corporation by the individual. In this memorandum, the remuneration received by an individual, from a corporation that he controls, for the duties or activities performed for the corporation by the individual will hereinafter be referred to as "remuneration for duties or activities performed by the individual." A corporation that is controlled by the individual with hereinafter be referred to as "his own corporation".

Subsection 240(1) of the Excise Tax Act (the "ETA") requires, with certain exceptions, that a person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada must be registered for GST/HST. Duties or activities performed by an individual for his own corporation must be analyzed on a case by case basis in order to determine if the individual is, in fact, making taxable supplies. This memorandum will outline the steps to follow in order to determine if an individual performing duties or activities for his own corporation is making taxable supplies. If the duties or activities performed by the individual are, in fact, taxable supplies, then the individual supplying the taxable supplies must register for GST/HST, except where the individual is considered a "small supplier" for ETA purposes. Details of the registration requirements for the individual will be discussed later in this memorandum.

Subsection 123(1) of the ETA defines "taxable supply" to be a supply that is made in the course of a commercial activity. The definition of "supply" in subsection 123(1) means, with certain inclusions and exclusions, the provision of property or a service. An exclusion in the subsection 123(1) definition of "service" is "anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person." Furthermore, subsection 123(1) defines "commercial activity" to include a business carried on by the person. The definition of "business" in that subsection specifically excludes office or employment income. Consequently, if all the duties or activities performed by an individual are related to either office or employment, there is no taxable supply made by the individual.

Subsection 123(1) of the ETA defines the meaning of "office", with certain exceptions, to be the meaning assigned by subsection 248(1) of the Income Tax Act (the "ITA"). Subsection 248(1) of the ITA defines "office" to mean "the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration ... and also includes the position of a corporation director, and "officer" means a person holding such an office."

An example of remuneration from an office is a director's fee. For a payment to an individual to qualify as a director's fee, we understand that the individual must receive a fixed stipend or remuneration for their duties performed as a corporate director. In the case of XXXXX, his remuneration was received for operating the company and performing the requirements of the contracts with the clients. Therefore, we believe that neither of these functions are considered duties of a corporate director.

For each individual, it is necessary to review the criteria outlined in the definition of "office" to determine if the remuneration for duties or activities performed by the individual is, in fact, remuneration from an office. If the remuneration for duties or activities performed by the individual is remuneration from an office, then the duties or activities relating to these payments are excluded from the definition of business and consequently there is no commercial activity in respect of these duties or activities. Furthermore, these duties or activities would not be considered services for ETA purposes.

As discussed earlier, pursuant to subsection 123(1) of the ETA, the definitions of business and service each exclude remuneration from an office or employment. Employment is not defined in the ETA, other than to say that an employee includes an officer. For each case, it is a question of fact and law as to whether there is employment income.

It should be noted that the ITA does have a definition for "employment." Subsection 248(1) of the ITA defines "employment" to mean "the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign) and "servant" or "employee" means a person holding such a position."

Generally, the Department's position is the employment status for a individual should be the same for income tax purposes as for GST/HST purposes. As such, the employment status as reported in an income tax return should be adopted for GST/HST purposes, unless there are compelling reasons for not doing so.

The C.P.P. E.I. Eligibility Division has developed general criteria based on fact and law for establishing if payments are employment income. Enclosed is a copy of the general criteria that a C.P.P. E.I. Rulings Unit at a Tax Service Office ("TSO") uses to determine if certain payments are a "contract of service" (for example, a servant or an employee) versus a "contract for services" (for example, a contract worker, a self-employed person or an independent contractor). With respect to the specific situation of remuneration received by an individual, from his own corporation, for his duties or activities performed for his own corporation, we have sent a memo to the C.P.P. E.I. Eligibility Division requesting a general employment status ruling.

Currently, for each individual performing duties or activities for his own corporation, the C.P.P. E.I. Rulings Unit at the respective TSO can assist the Non-Filer Non-Registrant Unit of the TSO in determining if the remuneration paid to the individual is employment income. Consequently, with respect to XXXXX specific situation, we have sent a memo to the C.P.P. E.I. Rulings Unit at the XXXXX TSO requesting the Unit provide a ruling concerning the payments to XXXXX[.]

As stated previously, if all the duties or activities performed by an individual are related to either an office or employment, then there is no commercial activity in respect of these duties or activities. Furthermore, these duties or activities would not be considered services for ETA purposes. Subsection 240(1) of the ETA is not applicable since there is no taxable supply made by the individual. As such, the individual cannot register for GST/HST.

If the duties or activities performed by the individual for the corporation are, in fact, performed in the course of a commercial activity and are supplies for ETA purposes, then the duties or activities are taxable supplies. The individual supplying the taxable services must register for the GST/HST except where the individual is a small supplier. In your case, the payments received by XXXXX from IRDC exceed the $30,000 small supplier threshold. Consequently, if it is determined that XXXXX XXXXX duties or activities are taxable supplies, then XXXXX is required to register for GST/HST.

In other cases, payments, for taxable supplies made by an individual, from their own corporation may be less than $30,000 annually. In determining the $30,000 small supplier threshold for the individual, the taxable supplies from all associates must be included. Section 127 of the ETA defines "associated persons". Where the corporation is controlled by the individual, the individual and the corporation are associated under subsection 127(2) of the ETA. Thus, you must make sure that the annual worldwide taxable supplies of the corporation are included in the calculation of the $30,000 threshold for the individual.

Answer to Request 3:

You requested clarification to Q&A GST8a.24, currently found in EARL. The Q&A states, "Some owners of private corporations choose to accept "management fees" rather than salaries from their corporations." This statement informs the reader that the person posing the question has already investigated that the duties or activities performed by the individual are, in fact, salary income. Salary income is remuneration received in the performance of duties or activities from an office or employment. As discussed earlier, the performance of any duty or activity in relation to an office or employment is not a taxable supply.

The first question in the Interpretation Requested section of this memorandum is formatted as follows, "Is the sole director of his own corporation receiving payment from the corporation in the form of "management fees" required to register for GST/HST?" This question does not imply that the payments in question have already been determined to be salary income. This memorandum outlines the steps to follow in order to determine if the duties or activities performed by the individual for his own corporation are, in fact, remuneration from office or employment. If the duties or activities performed by the individual are determined to be salary income, then Q&A GST8a.24 is applicable.

Should you have any further questions or require clarification on the preceding matters, please do not hesitate to contact Victoria Szabo at 613-8814.

V.A. Szabo
A Rulings Officer
General Operations Unit
General Operations and Border Issues Division

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