4 November 2004 External T.I. 2004-0101641E5 - Bonus or Commission

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.

Principal Issues: Whether a particular payment is a bonus or a commission.

Position: Question of fact. However, in this case, the payment is a bonus.

Reasons: The payments have the characteristics of a bonus. The contract refers to the payment as a bonus and employee cannot receive bonus unless still employed at time of payment.

XXXXXXXXXX T. Young, CA
2004-010164
November 4, 2004

Dear XXXXXXXXXX:

Re: Commission or Bonus

We are writing in response to your letter of April 1, 2004, to the Toronto East Tax Services Office that you forwarded to us. We also acknowledge our various telephone conversations (Young / XXXXXXXXXX). We apologize for the delay in responding to your inquiry.

You submitted a copy of the company's standard Employment Agreement with its sales staff. The contract includes a provision for the payment of a salary and a car allowance. Paragraph XXXXXXXXXX of the contract states:

XXXXXXXXXX.

You asked us whether the Bonus is considered a commission or a bonus for income tax purposes.

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 ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, which can be found on our web site at www.cra.gc.ca. However, we are prepared to provide the following comments, which may be of assistance to you.

Whether an employee is paid a commission or a bonus is dependant on the terms of the employment contract. Since the terms "commission" and bonus" are not defined in the Income Tax Act (the "Act") or the Income Tax Regulations (the "Regulations"), we must rely on the ordinary meaning of the terms. Various dictionaries emphasize the supplemental character of bonuses, wherein bonus payments are made in addition to the normal compensation expected by the employee. For example, Black's Law Dictionary defines a "bonus" as "a consideration or premium paid in addition to what is strictly due" and "(a) premium or extra or irregular remuneration in consideration of offices performed or to encourage their performance." Similarly, the Concise Oxford Dictionary of Current English defines a "bonus" as "a seasonal gratuity to employees beyond their normal pay", while Webster's English Dictionary defines it as "an amount paid over the sum due as...wages".

Black's Law Dictionary defines "commission" as a "compensation or reward...usually calculated as a percentage on the amount of his transactions or the amount received or expended." Similarly, the Concise Oxford Dictionary of Current English defines a "commission" as "a percentage paid to the agent from the profits of goods etc. sold, or business obtained", while Webster's English Dictionary defines it as "a percentage on sales paid to a salesman or agent'.

In our view, a commission is generally an amount that is computed as a percentage of sales achieved. On the other hand, a bonus is an amount in addition to the employee's normal remuneration that may be paid in recognition of achieving certain performance objectives, including the achievement of specific sales targets.

Based on the above, we are of the view that the bonus described in paragraph XXXXXXXXXX of the contract is a bonus, not a commission. Of particular significance is the fact that an individual is not entitled to receive the bonus unless the individual is an active employee at the time of the payment. This indicates that the payment is in addition to the employee's ordinary remuneration as opposed to a commission that the employee has earned and would be legally entitled to receive irrespective of the person's employment status at the time of the payment.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch

c.c. Randy Jenkins
Assistant Director, Client Services
Toronto East Tax Services Office