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 commissions earned by mutual fund salespersons and managers can be transferred to their corporations given the decision of the Tax Court in the Wallsten and Lakeside Properties case.
Position: If salesperson or manager is legally, either contractually or legislatively, precluded from transferring or assigning commissions to corporation, then commissions must be reported by the individual. If there is no legal prohibition against such an assignment, then income can be reported by corporation if corporation is carrying on the business.
Reasons: Consistent with prior opinions, IT-189R2, and our comments at the 2001 CTF.
December 21, 2001
Technical Applications and HEADQUARTERS
Valuations Division Wayne Antle, CGA
Audit Directorate (613) 957-2102
Jennifer Ryan
Manager
2001-010783
Transfer of Mutual Fund Commissions to a Professional Corporation
This is further to your memorandum dated October 29, 2001, concerning whether commissions earned by mutual fund salespersons can be transferred to, and reported by their corporations given the decision of the Tax Court of Canada in the case of Wallsten and Lakeside Properties v. the Queen (2001 DTC 215).
This issue was addressed at the recent Canadian Tax Foundation round table discussion held on September 25, 2001. The questions and our responses were as follows:
Topic 6: 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 (80 DTC 6239) 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 (64 DTC 5248) 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 decision not to appeal was made at the local level because 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, without doubt, 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.
The determination of whether commissions, including override commissions, can be reported through a corporation can only be made after reviewing all of the facts. If the mutual fund salespersons or managers are legally, either legislatively or contractually, precluded from assigning their commission to their corporations, then it is our view that the commissions must be reported by the individual salespersons or managers.
On the other hand, where there is no legal prohibition against the mutual fund sales or override commissions being assigned to a corporation, then the commission income should be reported by the person carrying on the business. The corporation would be considered to be carrying on the business if the activities of the corporation, and its relationship to its employees and clients, are similar to those ordinarily associated with a corporation carrying on a business. Please refer to Interpretation Bulletin IT-189R2 Corporations Used by Practising Members of Professions for example of such activities.
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 Department'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. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 3 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2001
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2001