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.
Will bank guarantee fees paid by a corporation to its owner/manager be considered earned income within the meaning assigned by subsection 146(1) of the Act?
Unles the taxpayer is in the business of providing loan guarantees, the amount would not be considered employment or business income for purposes of inclusion in the earned income definition.
M. P. Sarazin, CA
March 1, 2002
Re: Guarantee Fees and Earned Income
This is in reply to your letter of February 4, 2002, requesting our views as to whether guarantee fees paid by a corporation to its owner/manager for personally guaranteeing the corporation's bank debts would be considered "earned income" within the meaning assigned by subsection 146(1) of the Income Tax Act (the "Act").
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4, dated January 29, 2001. If the concerns relate to transactions that have already been completed, the enquiry should be addressed to the relevant tax services office. Consequently, we can only provide the following general comments.
Where an individual is resident in Canada throughout a taxation year, paragraph (a) of the definition of "earned income" in subsection 146(1) of the Act includes income from:
(i) an office or employment [determined without reference to paragraphs 8(1)(c), (m) and (m.2) of the Act which relate to deductions with for clergyman's residence, registered pension plan contributions and retirement compensation arrangement contributions];
(ii) a business carried on by the individual either alone or as a partner actively engaged in the business.
In our view, shareholders of a corporation may be required to personally guarantee the debts of the corporation but employees do not personally guarantee the debts of corporate employers. Therefore, guarantee fees would not be considered income from an office or employment for purposes of the definition of earned income. Unless a corporation's owner/manager is personally in the business of providing loan guarantees, guarantee fees paid by a corporation to its owner/manager will not be considered income from a business carried on by the owner/manager. Consequently, guarantee fees would not be considered earned income within the meaning assigned by subsection 146(1) of the Act.
We trust these comments will be of assistance.
Roberta Albert, CA
Financial Industries Division
Income Tax Rulings Directorate
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