9 November 2001 External T.I. 2001-0092495 - CTF ROUND TABLE-PROFESSIONAL CORPs

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: CTF Round Table Discussion on Professional Corporations in light of Wallsten Decision.

Position: Existing policy maintained.

Reasons: Wallsten was an informal decision. Our position is consistent with decision of Supreme Court in Campbell.

CTF 2001 Presentation

Topic 8: Jerome Wallsten and Lakeside Properties Ltd.

Wallsten and Lakeside Properties were informal decisions of the Tax Court of Canada dealing with whether commissions earned from the sale of insurance should be reported by Mr. Wallsten personally, or whether they were properly included in his corporation's income. Mr. Wallsten entered into a contract with Sun Life to sell that company's products, while being free to represent other insurance companies. Under the terms of the contract, he was prohibited from assigning his commissions to a third party other than as security. Despite this restriction, Mr. Wallsten argued that his business activities were being carried on by Lakeside Properties Ltd. He produced documents showing that all amounts received by him with respect to insurance underwriting and the sale of other securities were received on behalf of Lakeside. All cheques received from Sun Life were deposited to Lakeside's bank account. The CCRA included the income from the insurance sales in Mr. Wallsten's returns in accordance with the policy set out in paragraph 2 of IT-189R2, Corporations Used by Practising Members of Professions, which states that professional income should be reported by the individual providing the professional services where the individual is precluded from carrying out their profession through a corporation. The court found that Lakeside was carrying on the insurance sales business despite the fact that it was operating in violation of Mr. Wallsten's contract with Sun Life, and it cited the Supreme Court case of Campbell v. the Queen⁽¹⁾ as support for its decision.

Questions and Responses

Question 1

Will the CCRA accept that this decision applies to allow insurance agents, realtors, or mutual fund salespersons to transfer personal commission income to their corporations if proper documentation is provided, notwithstanding that they may be legally prohibited from assigning their commissions to third parties?

Response 1

We won't be following the decisions in the Wallsten and Lakeside Properties cases. These were informal decisions of the Tax Court of Canada. If insurance agents, realtors, mutual fund salespersons, or other professionals are legally, whether contractually or by statute, precluded from assigning their commissions to a corporation, then the commission income must be reported by the individuals, and cannot be reported through a corporation, regardless of the documentation provided. This is consistent with the 1964 decision of the Exchequer Court in Kindree v. the Queen⁽²⁾ in which a doctor, who incorporated his medical practice in violation of provincial law, was required to report his professional income personally.

Question 2

How can the CCRA continue with its existing policy given the decision of the Supreme Court of Canada in Campbell v. the Queen which was cited by the Tax Court Judge in the Wallsten and Lakeside Properties cases?

Response 2

We feel that our position is not inconsistent with the decision of the Supreme Court of Canada in H. Campbell v. the Queen. In fact, we have maintained our current position since that decision was handed down in 1980. In that case, Dr. Campbell incorporated a company to operate a private hospital which was properly licensed under the Private Hospitals Act of Ontario. The Supreme Court found that the medical fees paid to Dr. Campbell were income of the corporation. One of the reasons given by the court for its finding was that the company was operating a hospital providing a broad range of services which was permitted under provincial laws, rather than practicing medicine, which was not allowed under such laws. The Wallsten and Lakeside Properties cases are distinguishable in that the facts clearly indicated that Lakeside was carrying out its activities in violation of Mr. Wallsten's contract with Sun Life.

Question 3

Since the CCRA is not following this decision, why didn't it appeal these cases?

Response 3

The impact of the cases was likely under-estimated. This is not unusual given the nature of the proceedings under the informal procedure, and the volume of cases dealt with each year. We will likely get the opportunity to test this issue in the courts again.

Question 4

Will the CCRA allow an insurance agent, realtor, or similar professionals to report their commission income through a corporation where they are not otherwise precluded from assigning such income to the corporation?

Response 4

Yes. If the corporation is carrying on the business, then the commission income would be reported by the corporation.

Prepared by Marc Vanasse

ENDNOTES

⁽¹⁾ The Queen v. Dr. H. Hoyle Campbell (80 DTC 6239)

⁽²⁾ Laverne Clifford Kindree v. MNR (64 DTC 5248)