29 October 2001 External T.I. 2001-0093655 - COMMUNAL ORGAN. INCOME

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: Whether amounts paid by a company to communal organization individuals are employment income or income of a corporation of which the individuals are shareholders

Position: question of fact

Reasons: who was contracted to do the work

XXXXXXXXXX 	2001-009365
		Shaun Harkin, CMA
October 29, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Income Reporting

This is in reply to your letter of July 9, 2001 and subsequent to our telephone conversation (XXXXXXXXXX/Harkin) of October 16, 2001 requesting our views as to whether the income paid by a business ("Company X") to individuals constitutes employment income of the individuals or subcontract earnings of a corporation of which the individuals are shareholders when the following conditions exist:

1. The shareholders of the corporation are all members of a "communal organization" within the meaning of this term in section 143 of the Income Tax Act (the "Act").

2. The corporation was formed to provide farming and trucking services.

3. The individuals do not benefit directly from the funds received from Company X as they are given to their corporation.

4. There is no legal agreement between the individuals and Company X that specifies that the individuals are working on behalf of the communal organization.

Also, as discussed in our recent telephone conversations you would like to know if it is possible for the income received by the individuals to be "taxed" in the hands of the communal organization.

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. If, however, the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.

Whether the amount paid by Company X constitutes employment income of the individuals or subcontract earnings of the corporation of which the individuals are shareholders is a question of fact. A significant fact is whether Company X has contracted with the corporation for services or entered into a contract of services (i.e. an employment contract) with each individual. In the former case, the funds paid by Company X would be paid to the corporation; therefore, the funds would be subcontract revenue of the corporation.

Section 143 of the Act applies to communal organizations. However, in our view, section 143 of the Act applies to income that is derived from business, property or the other activities of a communal organization. It does not apply to any income received by a member of a communal organization in his or her own right, such as employment income. It is our view that a member's income received in their own right is taxable in the member's hands. In any given situation, it is a question of fact whether income received by an individual was received in their own right, the determination of which would depend on the terms of the particular arrangement between the individual and the communal organization.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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